Understanding bonds: sorry for my ignorance; help appreciated.

[Tangler]

Looking at buying some short term treasury bonds. Trying to understand bonds better.

The Question: in the attached screen shot:

The face value is $1000, the coupon rate says 0. The yield says 0.981%

Question: At the end of the maturity do I get $1000 + 0.981%?


If you hold this bond until maturity do you get 0.981% (the yield) or do you get zero (the coupon).

How is this yield different from the yield to maturity? (YTM)




See the attached screen capture please.

[Lithium]

If the maturity is 3 months, you get the yield x maturity length/1 year. So if the maturity period is 3 months, you get 0.327%.

After 3 months you get $3.27 and can buy a Miller Lite. After 1 month, you get $1.09 and can buy a can of coke.

[Tangler]

If the maturity is 3 months, you get the yield x maturity length/1 year. So if the maturity period is 3 months, you get 0.327%.

After 3 months you get $3.27 and can buy a Miller Lite. After 1 month, you get $1.09 and can buy a can of coke.

Awesomeness! thank you! That makes sense!

[Random1]

At the end of 3 months you get face value, the interest is the difference you paid for them. You bought $1000 bond for $997.05.

[Lithium]

Random1 is in fact correct. I looked at that before I had my AM coffee.

The 3 month YTM is calculated here and is higher than the yield shown there:

https://dqydj.com/bond-yield-to-maturity-calculator/

I am not sure where the 0.981% comes from. It might be the 1 month YTM.

[Random1]

Usually shorter duration are bought at a discount. Longer treasuries typically pay a coupon rate, if bought at auction they are yield to maturity. If bought on secondary market you may pay a discount or premium based upon market conditions and duration, you will see a yield to maturity with reflects the purchase premium/ discount and the fixed coupon amount. Typically at maturity you get the face value of the bond.

[Lithium]

Actually the yield turns out to be YTM once you change the term from 3 months to about 3.5 months (maturity is 8/30/22).

[Tangler]

At the end of 3 months you get face value, the interest is the difference you paid for them. You bought $1000 bond for $997.05.

That is what i thought but it is a little confusing.

[Tangler]

Actually the yield turns out to be YTM once you change the term from 3 months to about 3.5 months (maturity is 8/30/22).

Cool calculator! Useful!

So the book I am reading says: YTM = yield to maturity = interest rate that will make the sum of the present values equal to its market price.

Market price (sometimes) is lower or higher than the par value (face value) (ex. 1000 bond discounted to $997.05)

So if you know the bonds market price, (and you have your calculator) you can calculate the necessary interest rate that will make the sum of the present values equal to the market price.

This necessary interest = YTM

I think VG is giving us this and the reason the bond pays something (anything) with a zero coupon is because we are buying it for less than face value (par value).

As random 1 says, we are buying a 1000 bond for less than 1000 (in this case $997.05),

but the end of the term (end of 3.5 months = 8/30/22) we will get the face value back (which is 1000) + the zero coupon for a total return of $2.95. (1000-997.05)

I guess $2.95/3mo. =0.983, which is almost 0.981 which is listed as our "yield".

So we get 0.981% per month? Is that correct? Or is it 0.981 per year? Am I goofing it up here?

Here is another thing that sorta makes sense:

If the bonds purchase price is equal to the par value (face value) (1000), then the coupon rate (interest rate) = current yield = yield to maturity (YTM).

If you buy this bond for 1000 and in 3 months they give you back 1000 you make zero. (0 = coupon rate = current yield = YTM)

If the purchase price is less than the par value and you hold it to term you get the full par value back and thus you make more money than just the coupon rate (interest rate) which is zero.

Thanks again for the assistance, sorry for occasionally being dumb as a sack of rocks.

I will ultimately need a bond ladder or CD ladder and I am trying to figure out what exactly these terms mean for the simple doc.

[Dont_know_mind]

Looks like a zero coupon treasury bill.

Regular bonds, which are also called coupon bonds, pay interest over the life of the bond and also repay the principal at maturity. A zero-coupon bond does not pay interest but instead trades at a discount, giving the investor a profit at maturity when they redeem the bond for its full face value.

[Tangler]

Looks like a zero coupon treasury bill.

Regular bonds, which are also called coupon bonds, pay interest over the life of the bond and also repay the principal at maturity. A zero-coupon bond does not pay interest but instead trades at a discount, giving the investor a profit at maturity when they redeem the bond for its full face value.

Thank you!

[nastle]

In one of my buckets I have about 40% Bonds what are the thoughts of the members here about converting them to Stocks right now since the prices are much lower?
I don’t need them for another 12 yrs or so

[Tangler]

In one of my buckets I have about 40% Bonds what are the thoughts of the members here about converting them to Stocks right now since the prices are much lower?
I don’t need them for another 12 yrs or so

What does your IPS say? No one knows the answer to what will happen next. I think it is a good time to buy and in 12 years will be higher but i could be wrong.

What does your IPS say? Is this a part of your plan?

[nastle]

What does your IPS say? No one knows the answer to what will happen next. I think it is a good time to buy and in 12 years will be higher but i could be wrong.

What does your IPS say? Is this a part of your plan?

I have no financial planner
I have these assets in the permanent portfolio and golden buttery portfolio right now

[Tangler]

I have no financial planner
I have these assets in the permanent portfolio and golden buttery portfolio right now

Your IPS = investment policy statement = written financial plan needs to have a plan for bear markets and downturns.

If you aim at nothing, you will hit it every time.

Aim at something.

Have a plan.