Introduction to US Corporate bonds investment . Part 2

Bonds research and selection

One of the best site to perform bond research is 
http://finra-markets.morningstar.com/BondCenter/Default.jsp







The key is to expand the 'Advanced Search' on the bond tab. These are the key metrics in selecting bonds.
By default, I will select Corporate bond and 'ALL' Debt Instrucment Type'

The rest of the key metrics will be dependable on investor risk appetite.

1)Coupon and Interest

2)Maturity Date

3)Ratings and Credit

4)Calls and Options

5)Trade Parameters Date and Price

6) Yield to Maturity, Yield to Call and Yield for worst (for bonds that past callable date and can be called anytime)

Here are some definition of these metrics:

A coupon rate is the yield paid by a fixed-income security; a fixed-income security's coupon rate is simply just the annual coupon payments paid by the issuer relative to the bond's face or par value. Thecoupon rate is the yield the bond paid on its issue date.

The maturity date is the date on which the principal amount of a note, draft, acceptance bond or another debt instrument becomes due and is repaid to the investor and interest payments stop. It is also the termination or due date on which an installment loan must be paid in full.

A bond is considered investment grade or IG if its credit rating is BBB- or higher by Standard & Poor's or Baa3 or higher by Moody's. Generally they are bonds that are judged by the rating agency as likely enough to meet payment obligations that banks are allowed to invest in them. 

Bond Call Option. A bond option is a contract that gives an investor or issuer the right to buy or sell a bond by a particular date for a predetermined price. A buyer of abond call option is expecting a decline in interest rates and an increase in bondprices. 

Yield to maturity (YTM) is the total return anticipated on a bond if the bond is held until it matures. Yield to maturity is considered a long-term bond yield but it is expressed as an annual rate.

Yield to call is the yield of a bond or note if you were to buy and hold the security until the call date, but this yield is valid only if the security is called prior to maturity. The calculation of yield to call is based on the coupon rate, the length of time to the call date and the market price.

Yield to worst (YTW): when a bond is callable, puttable, exchangeable, or has other features, the yield to worst is the lowest yield of yield to maturity, yield to call, yieldto put, and others. 

To illustrate an example what all these metrics mean. Let key in Apple as the bond issuer. You will see a long list of bond from Apple with different maturity date.

When a bond is first IPO, the par value is usually 100 dollars and the interest rate at par value $100 is the coupon rate. However, due to interest rate fluctuation,  demand and supply, credit rating or company earning report, the price will change constantly like any stock price. 

Looking at the first row below, Apple bond with Symbol 'AAPL4001809'  has a coupon of 2.4% if you buy at par value of $100 and it will mature in 05/03/2023 which is about 4 years time. However, due to market condition, the trading price has dropped to $98.183. This means you could purchase the bonds at a cheaper price at below par value . Upon maturity , you will receive $100 back for the bond you have purchased at $98.183. The gain in capital plus the coupon rate will mean your return will be higher,so the Yield column indicate the real yield or yield to maturity  will be 2.861%. 

Looking at the fourth row below, Apple bond with Symbol AAPL4122391
has a coupon of 2.1%  if you buy at par value of $100 and it will mature in 05/06/2029 which is about 3 month time. Its bond price has increase above par value and is $100.07. As you will receive $100 back for the bond you have purchased at . $100.07.The loss in capital plus the coupon rate will mean your return will be lower,so the Yield column indicate the real yield or yield to maturity  will be 1.757% which is lower than your coupon rate.. 

 
With some understanding of these key metrics , we can expand the scope of our bond search. In the below example, we want to check what bonds are available that mature in 10 to 15 years time , have investment grade ,  coupon rate of 4% to 6% , trade yield (YTM) of 4% to 10% and trade price from $95 to $105. You will get about 4 pages of result that suit your input criteria , scroll through and marked them if you like to explore them so that they get into your watchlist.  You probably see the YTM is around 4% to 6% which is about 1.5% to 2% higher to the 10 years T-bill (currently at 2.7%). The YTM basically fluctuate around the daily T-bill price movement. 



As a fixed-income investor, I would like to build a bond portfolio that mature at different date and with different payout date so the income is consistently received.

In the next article, I will write how about bonds purchase online and share my bond portfolio.