Bonds alternative to Gics | General financial discussion | Discussion forum

hotmony said
An hsbc canada bond maturing 10/21/25
Coupon 4.45
Price 108.7627
Yield 2.95

What is the final yield on this bond to the investor if held to maturity around 2%?

Bce strip bond for rrsp good bad compared to gic?
12/1/2034
Price 53.16
Yield 4.11 compounded right?

reference: https://www.questrade.com/bonds

I find industry wide a lack of transparency and knowledge about bonds like calculations.  

The reason is because when it matures, it's going to mature at par value, which is usually $100.00 or $1000.00 depending on the minimum purchase increment. In that example, you've got a premium bond in that it's trading at a premium to its par value.

That looks to be rather expensive. 2.95% for a mid-tier Canadian bank bond. You could do better in a "Big 5" bond, in a preferred share if you're willing to take a bit of market risk, or the same or better in a mid-tier Canadian bank deposit insured GIC. 🙂

Bond math was the chapter I did the worst on in my Investment Funds In Canada course. Current yield is easy to calculate, but average yield to maturity is challenging especially when you have to manipulate the formula when you have different known quantities. Here's a tutorial on it, if you're inclined:

https://courses.lumenlearning.com/boundless-finance/chapter/valuing-bonds/

Cheers,
Doug

hotmony said
Check out Hank Cunningham's bond calculator maybe someone can download it in another format

https://www.odlumbrown.com/research/fixed-income-research#2

Also his book has anyone read it http://www.inyourbestinterest......hebook.php

Guy has come as close as I've seen to explaining bonds to retail investors.  

Yes, I like Hank Cunningham. One of the best fixed income commentators - he actually makes bonds make sense, sort of. 🙂

Cheers,
Doug

Agreed the bond pays out 2.95% effective yield, net of the capital loss at maturity.

What happens is the bond actually pays coupon rate interest until maturity, but with the capital loss at maturity, the present value yield is thus 2.95% instead of 4.45%. I buy short term bonds (4-6 years) sometimes instead of GICs in my RRSP if yields of a BBB+ (or A-) corporate bond from selected issuers like Enbridge, are higher than the equivalent compound GIC. There was a period of time of 1-2 years in the not so recent past (before the run up in GIC yields) where BBB+ bonds had better yields than 5 year GICs at discount brokerages. That is no longer the case and so I am renewing matured bonds with GICs again.

I only have bonds and GICs in my RRSP.

Bill has provided a good added summary on the taxation of the bond income and the capital loss that you can use to offset future capital gains or capital gains which you've incurred in the preceding three years.

Regarding Bankers Acceptances, these are generally like GICs and are issued directly by banks (not sure about credit unions) to corporations and, to a lesser extent, high net worth individuals. Rates are on a case by case basis and booked by the bank's Treasury department. Presumably, the rates are tied very narrowly to some sort of benchmark rate (probably CIDOR, LIBOR, etc.), plus a nominal premium to the bank (usually about 10-40 bps, depending on the client's business with the bank). There are minimum dollar values to book a BA - usually $1 million is the minimum. They are not CDIC insured due to their dollar value, but if they were offered in sub $100,000 increments, then there'd no reason why they wouldn't be.

That said, the rates are generally not better than you or I can get with a mid-tier Canadian bank or provincially-regulated credit union so BAs offer no advantages.

Interestingly, as part of my cross-training at HSBC, booking a BA rate and posting all of the accounting entries to various bank G/Ls and the customer's account with one of the bank's Commercial Financial Services Officers was one of the first things I learned. It was a bit daunting and is not that all much different, in terms of accounting entries, than booking a large foreign exchange spot (or futures) contract.

Cheers,
Doug

Doug said
…

Regarding Bankers Acceptances, these are generally like GICs and are issued directly by banks (not sure about credit unions) to corporations and, to a lesser extent, high net worth individuals. … There are minimum dollar values to book a BA - usually $1 million is the minimum. They are not CDIC insured due to their dollar value, but if they were offered in sub $100,000 increments, then there'd no reason why they wouldn't be. …

TD Canada Trust branches offer Bankers' Acceptances and Bearer Deposit Notes in as little as $5,000 amounts.

Bankers' Acceptances are not CDIC insured because they are not really deposits. They are IOU's from a borrower stamped with a guarantee stamp from a bank. The bank can stamp one of its own IOU's. Those are called Bearer Deposit Notes and are not deposits either.

BA and BDN yields are quite low reflecting the high credit ratings of the guarantor banks. Current rate for 1-month and 3-month BA's are around 1.83% and 1.90%.

Doug said

…. I wonder, though, if bankers' acceptances can have different meanings? I note that TDCT sells those "bankers acceptances" as part of its mutual funds distribution arm.

The money market products web page instructs client to visit a TD Canada Trust branch. It is not clear if one will end up with a TD Bank account or a TD Investment Services account to hold the purchased BA's. I don't think that will affect what the BA is itself.

Fair point, but I would disagree that the bank's own IOU is called a "bearer deposit note". I can confirm, from personal first-hand information and knowledge, that HSBC's own IOUs are called "bankers' acceptances".

That's a subtle distinction that TD makes. It isn't significant who the issuer of the BA is. Investors look at who the guarantor or accepting bank is to determine the risk.

Norman1 said

Doug said

…. I wonder, though, if bankers' acceptances can have different meanings? I note that TDCT sells those "bankers acceptances" as part of its mutual funds distribution arm.

The money market products web page instructs client to visit a TD Canada Trust branch. It is not clear if one will end up with a TD Bank account or a TD Investment Services account to hold the purchased BA's. I don't think that will affect what the BA is itself.

Fair point, but I would disagree that the bank's own IOU is called a "bearer deposit note". I can confirm, from personal first-hand information and knowledge, that HSBC's own IOUs are called "bankers' acceptances".

That's a subtle distinction that TD makes. It isn't significant who the issuer of the BA is. Investors look at who the guarantor or accepting bank is to determine the risk.  

Good points, Norman. I hadn't considered the latter point that BAs could be issued by someone else, but guaranteed by the financial institution. And yes, it's quite likely the TD BAs are held in a TD Investment Services account, but you're right in that does not matter as one can hold even CDIC-insured deposit products in investment accounts managed by mutual fund dealer subsidiaries. The important part is that their account statements disclose which products are CDIC insured and which are not.

Cheers,
Doug