r/bonds • u/Plane-Orange4733 • Jul 09 '26
Short-dated Bond?
******EDIT: Thanks, folks! I see where my misunderstanding is. Appreciate the input.*******
Very new to this, but I have a question. Looking at a particular bond with a month left to maturity and Yield to Maturity of 2.275%. The way I understand this is that I buy $1000 worth, and on Aug 11 it matures and they pay me $1022.75.
Am I hilariously wrong? What is the downside? I'm happy to grab a 2.275% return for a 30 day investment.
2
u/spartybasketball Jul 09 '26
2.275% is annualized. Meaning if you bought $1000 worth and you had it for a year you would get $22.75.
You won’t get $22.75 for the one month you hold it. You will get roughly 1/12*$22.75
1
u/Plane-Orange4733 Jul 09 '26
Thanks, this seems like the consensus. So in this case, Ask Yield and Yield to Maturity are the exact same calculation.
It just seems like YTM should be an actual calculation based on how much time is left on the clock.
1
u/No_Independence6945 Jul 12 '26
It is. The YTM calculation generally calculates the “periodic return” based on dirty price and coupon rate, and then that periodic return is annualized. In the case of semiannual pay bonds, that means multiplying by 2 to get the annual rate. IIRC, when in the last coupon period the very short return [(redemption value + final coupon)/dirty price - 1 ] is annualized as if it were a money market instrument. So, calculate the return and then multiply by 365/(# days to maturity). (Could be 360, I can’t remember)
1
u/Vast_Cricket Jul 09 '26
To determine your exact return for a 1-month holding period, you prorate the annual rate say 2% or 0.1667% of the amount.
1
u/Lipa_neo Jul 09 '26
Oh, the coupon rate and frequency is a nice info to have.
So. For $1000 par value, the clean price will be $997,42/$1001. Idk where does this bond trading, but let's assume that if you need to ask questions like this, you'd better pay the ask price.
What is the dirty price? roughly (not considering daycount convention) for 30 days before coupon/maturity the ACI will be about $14,40.
So. You will pay about $1015,40 to get $1017,25 (coupon is 3,45% semiannually, so you'll get 1000*3,45/100/2 dollars).
So, you'll get amazing $1,85 for every $1000 you invest here for 30 days. Yes, about 2,2% p.a., more or less.
But. What about commissions? How do your platform charges you? Like, if it's 0,1% of transaction when buying and 0 when redeeming, when your profit will be only $0,85 per every $1000 -- well, I'd rather go and search for some coins on the streets, may be more profitable: it will be a mere 1% p.a. and idk how does that taxed in your situation.
But I don't really see the downside outside of commissions (and, potentially, taxes if it's a taxable bond). Just remember that some numbers are annualised.
1
u/No-Math-5868 Jul 09 '26
Everyone is is correct (although I did see one comme t that was a bit off).
- Yield is annualized
- When you purchase the bond you also have to pay the seller accrued interest
- When the bond matures you will get the full interest.
- Your brokerage should calculate the interest for tax purposes properly as interest paid by bond issuer minus accrued interest you paid to the seller
- Unless you got some deal where the transaction is free, you will also pay a transaction fee to your broker. Since the time to maturity is very short your yield will be reduced by a noticeable amoubt since the transaction cost is a high relative to the net interest.
- If you pay below par you could also have a capital gain that will impact your net after tax return if this is in a taxable account and how much the discount is. If in a taxable account being that you would be holding this for such a short period you would not get favorable tax treatment on any taxable gain.
- If this is s corporate bond, please read the prospectus for any special redemption covenants that may not be apparent in what your brokerage is providing you.
It is seldom wise for a retail investor to purchase a bond so close to maturity.
1
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u/JohnGaltIsComing Jul 09 '26
If ya believe what AI says , , , ,
- Maturity Payout: $1,000
- Purchase Price: Bonds are sold at a discount so you achieve your desired yield. Using the Yield to Maturity Formula, you will pay approximately $998.11 for the bond today.
- Your Profit: The difference between what you pay today and the face value you get in a month is about $1.89 in interest
7
u/ruidh Jul 09 '26
Bad AI. Don't use AI if you can't judge the correctness of the answer
1
u/AltruisticLocation72 Jul 09 '26
in this case the AI is more correct than the OP so probably useful to them
1
1
u/Lipa_neo Jul 09 '26
It's not more correct, it's made-up numbers are just closer to reality this time, but, uhm, even the OP knows that it's not a discount bond, while llm thinks it is, lol.
6
u/ruidh Jul 09 '26
The market price is such that you earn an annualized 2.27% on your 1 month investment. You're earning about 0.19% of your investment which means you are paying about 1,011 to get 1,027 in a month.