Member Since: Nov 6th 2019
Principal Second Chair LLC
Nov 6th 2019
Pretty good job. One comment: It is not correct to say that buying bonds when they are initially issued is the best way to go, this is a common misconception, often engendered by broker sales pitches (brokers are urged by their firms to "participate" in new deals and often the sales commissions are more generous than on secondary market trades.)
1. On any trading day that a new issue of bonds is offered there are numerous other, highly similar bonds (in some cases nearly identical) that are offered by dealers in the secondary market and often at prices that make them very competitive with any new offerings. In fact, because secondary market offerings must compete for investor dollars with any new issues, it is common to find better deals.
2. It is mistakenly believed that there are no mark-ups on bonds when they are newly issued. Not so. In an underwriting of new bonds, the issue is purchased in whole by the underwriting syndicate of dealers and then re-sold at a marginally higher price to investors. Moreover, this mark-up can be greater than on secondary market purchases.
3. Waiting around for new issues before investing is like catching a falling knife. Bond issuers do they best they can to come to market when rates are lower rather than higher. Waiting for new issues can be a fool's game.
4. There is an additional mistaken belief that there is some value in buying bonds at the common new issue offering price of par (100), rather than at a discount or premium to par. This is simply not so. The metric to focus on when making any bond purchase is the "yield to maturity." This total return measure is the great leveler of returns on bonds.