Sims e-Newsletter
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The experts at Sims answer some of the most frequently asked questions about bonds.
Why are some bonds not rated? There are many reasons why a bond may not be rated. The issue may not have been large enough to warrant spending the money to get a rating. A more common reason would be that the borrower would not qualify for an investment grade rating. Another plausible reason would be that the borrower may not want to be constrained by covenants and ratios that most rating agencies impose. Regardless of what sector the rating agencies review, a project needs years of operation before it can achieve a rating. Obtaining a rating reduces the yield to the investor. Is the bond insured? As with ratings, if a bond is insured the risk is therefore reduced and so is the return on the bond. Should I invest now or wait for higher interest rates? The press seems to continually highlight Fed rate increases and the prospect for higher rates. People have a built-in mindset that rates are going to get higher, and usually investors want to know why they would invest now versus waiting for those double-digit rates they think are headed their way. Since your money is not working, waiting is usually not a good strategy. The longer your money sits idle, the higher the rates will have to become to make up for what you missed out on while you were waiting. We don't advise that clients should always be 100% invested, but waiting to invest money earmarked for your fixed income portfolio will almost always cost you money. There will always be market pundits who have differing views on interest rates and their movement compared to what is currently available. Listening to them is sound advice, but inaction is never the right course. We always pick bonds that represent the best value regardless of interest rate movements. Speak to one of our Financial Advisors about how to balance your short- and long-term fixed income needs to maximize your total return. Why buy direct from HJ Sims? We occasionally offer bonds on the secondary market. As an investor in a bond fund, you may actually already own part of a Sims underwritten bond and not even know it. While we heartily endorse investing in our bonds, we do suggest that you buy them directly from us. The result is a more competitive rate for you, the investor. If the rates go higher, what will happen to the value of my bonds, and by how much? Interest rates and bond prices move inversely to one another. When rates go up, prices go down – and when rates go down, prices go up. The change in the value will also be affected by how you reinvest your coupons. The best way to insulate your portfolio from changing rates is to ladder it. How often do my interest payments come? Most municipal bonds pay semi-annually. Why do I have to tie up my money for so long? Just because you buy a bond that matures in the future, it doesn't mean that your only option is to hold the bond until it matures. There is an active market in bonds, both corporate and municipal. While not every bond trades every day, bonds have liquidity and can be bought and sold like most other financial instruments. Why are some CCRCs income tax free? Most municipal bonds we sell are for not-for-profit CCRCs. These facilities qualify as 501(c)3 entities, and under the tax code are able to sell tax-free municipal bonds to build their facilities. What does the underlying rating mean? Underlying ratings refer to bonds that are enhanced, usually by a third party, to guarantee principal and interest in the event of default. An underlying rating means what the rating would be if the bonds were not enhanced. Why should I pay a premium? People often confuse purchase price with total return. Paying a premium can be a good strategy to improve your current income. Most people think that if they pay a premium, they will have a loss should the bonds get called prior to maturity or when they mature at par; however, both of these assumptions are incorrect. When bonds are sold, they are sold based on the worst case scenario; so if you pay a premium, your investment counselor should tell you what the lowest possible return will be. Paying a premium is a good strategy as long as the income is higher than what current par bonds can provide. How many bonds should I buy? Bonds are bought in $5,000 pieces. We advise that clients buy bonds using $10,000 as a minimum. $5,000 bond pieces will not trade well in the secondary markets should you need to liquidate your bonds prior to maturity. Does the interest rate ever change? Unless we state otherwise, the interest rate on most municipal bonds is fixed and never changes. We do sell what are known as adjustable rate put bonds. Adjustable rate put bonds have a fixed rate for a predetermined period of time, at which point the bonds can be tendered, called, or reset to a new rate for a new time period. |
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Dick Larkin on CNBC
Dick Larkin, Director of Research at Herbert J. Sims & Co. shares his insight on bond insurers with CNBC's Charlie Gasparino.
Disclosures
This site has been designed for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any security, which may be referenced upon the site. Such offers can only be made where lawful under applicable law.