Questions about a Bond investment. (And did I get screwed?)

September 13, 2008 1:55 PM

In June 2007, I bought a 5-year bond with a 6.5% coupon on the day it was issued. I understand how bond prices rise and fall, generally as a result of interest rates and confidence that the bond issuer will be able to repay the debt. However, I have a few nagging questions about this investment...

I paid $100 per unit, but on the first day, it traded around $96. A month later it peaked at around $99, and since then the price has slowly sunk and is currently valued at $83.99

My questions:

1. Is there an advantage to buying a bond at the time of issue vs buying it on the open market? Wouldn't seeing some history of the bond price be a huge advantage? Why get in early?

2. Why did the bond lose 5% of it's value essentially instantly?

3. How can I pay $100 for a bond, but historical price charts do not show that $100 was reached?

I have asked some of these questions to the people who sold me the bond, but I wasn't happy with the answers. This same investment company also sold asset-backed commercial paper to ultra-conservative investors and told them it was as safe as a GIC. (Whoops!) So, I'm looking for more details and information before following up with them.

posted by kamelhoecker to work & money (4 comments total)

I am not your bond analyst, and depending what you actually bought, these thoughts could be of very minimal use to you, but, with that said

June 2007 was an unlucky time to buy a bond -- it was when the credit bubble was just starting to burst and perceived risk (and demanded yields) about to skyrocket. When yields demanded in the market go up, prices go down.

Under ordinary circumstances, buying the bond at issue isn't a bad idea. Underwriters try to slightly underprice a bond at issue, because people get a nice fuzzy feeling when their bond trades up, and come back to the same underwriter with a bigger order the next time around.

In terms of historical precedent, most bond issuers are repeat players and you can get plenty of historical information from other bonds of the same issuer. Buying the very first public credit instrument of an issuer new to the market -- i.e., no historical precedents -- is a bit aggressive, if you ask me.

Question #2 -- can't say without specifics, but see the June 2007 dynamics as a possible answer.

Question #3 -- most price charts harvest data from secondary trades only, not from the underwriting, and the lack of any $100 print in whatever chart you're seeing would be quite consistent with your account of an immediate drop to $96.
posted by MattD at 2:21 PM on September 13, 2008

Brokers sell bonds to folks like you and me at issue because we desire fixed income products. If we were bond traders, looking to capitalize on changes in price, we'd almost never buy at $100...Consider the conditions necessary for the price to go much higher than $100: a huge flight to safety.
posted by fatllama at 5:04 AM on September 14, 2008

The YTM right now is over 10%. The reason it would be that high is, a) the company is nearing default, b) thinly traded, and somebody has needed to unload a large position in them and they've just been taking it in the pants, c) provisions that make it unattractive to hold or complicated, or d) something else.
posted by milkrate at 5:26 PM on September 14, 2008

Thanks for the answers and insight!

btw, I believe the bond is thinly traded - basically it looks like individual investors need the money (or are nervous) and have sold small chunks at a loss. There are less than 50 trades in the last year and the average amount is around 15k.
posted by kamelhoecker at 6:25 AM on September 17, 2008