"Tad Borek" <borekfm[at]pacbell.net> wrote
- quote -

?

I spoke only to "callability" in general. I have no
particular position on individual munis at this time, so
your post seems misplaced.

On Feb 16, 3:36 pm, p...[at]his.com (Paul Michael Brown) wrote:

<snip
- quote -

Your paragraph above implies that there is more price risk in a bond
fund than in an individual bond of the same duration, which is
incorrect. The NAV volatility of a bond fund will generally be LOWER
than the price volatility of a bond, since a fund is more diversified.

Tad Borek:

- quote -

PIMCO Bond God Bill Gross was recently quoted in Barrons as saying he
invests in closed end municipal bond funds. While I'm sure his portfolio
also includes individual bonds, I think it's significant that even
somebody as sophisticated as Bill Gross sees the value in buying munis via
a fund.

- quote -

That's some bid/ask spread! In today's low-rate environment, that's just a
killer.

Meanwhile, last time I checked, Vanguard's Long Term Munibond fund (VWLTX)
charged about 16 basis points (0.16 percent) annually.

- quote -

Excellent point. And I'll add that if you're giving away three to five
percent in transaction costs to own individual bonds, you can easily
accept the fluctuating net asset value that comes with investing via a
fund. Unless some emergency causes you to sell after a sharp backup in
rates, the risk to your principal is very manageable. Which, to my mind,
eliminates the last reason to hold individual bonds.

- quote -

If you're in a high-tax state, you can find state-specific closed end
munibond funds by searching at www.etfconnect.com. Granted, the fees on
those funds are higher. Any many are leveraged -- which is not for
everybody. But for high bracket investors the CEFs are a good option in
taxable accounts.

<beliavsky[at]aol.com> wrote
- quote -

The /future/ volatility of interest rates is known with
certainty?

- quote -

How does one test the accuracy of such pricing, hm?

Do all "financial engineers" come up with the same price for
a callable bond?

Or could it be that OAS analysis, for one, varies with the
user?

- quote -

Of course there is /some/ substance in it.

"catalpa" <catalpa[at]entertab.org> wrote
- quote -

Are you implying that OAS analysis is not formula based and
not fraught with assumptions? Because it is. I sure hope
you're not splitting hairs over the use of my word
"formula."

One problem with mathematicians and the like becoming
"financial engineers" is that they tend to think every set
of numbers from the past denotes a useful pattern for the
future. They often overlook uncertainties when putting
numbers into the mill to grind out a conclusion--because
just getting the conclusion is enough for them, incomplete
as the latter actually is.

I continue to caution anyone from being intimidated by
claims that only higher math enables a competent
understanding of financial planning. That's simply false.

On Feb 14, 4:59 am, "John Richards" <j...[at]blackhole.invalid> wrote:
- quote -

Many students in Master's programs in Financial Engineering do have
Bachelor's degrees in math, physics, and engineering, and most
"financial engineers" on Wall Street have a PhD in one of those
subjects, as do I. A good financial engineer has advanced training in
math, statistics, numerical analysis, and mathematical finance
(portfolio optimization, derivatives pricing) and is able to program.
As catalpa observed, pricing callable bonds fairly relative to
noncallable bonds requires a nontrivial mathematical model. Such a
model will have inputs that are not known with certainty -- in
particular, the future volatility of interest rates -- but a financial
engineer will be able to price a callable bond more accurately than a
nonprofessional.

A term that is often used instead of "financial engineer" is "quant",
short for quantitative (financial) analyst. A good introductory book
on derivatives pricing is "Options, Futures, and other Derivatives" by
John Hull, and the autobiography "My Life as a Quant: Reflections on
Physics and Finance" by Emanuel Derman conveys the flavor of the
field. Browsing those books would convince open-minded people that
there is some substance in quantitative finance as a sub-field of
finance.

On Feb 14, 9:59 am, "John Richards" <j...[at]blackhole.invalid> wrote:
- quote -

John

The typical quant desk at an investment bank is *full* of Phds in
physical sciences and engineering. Similarly MFE programmes normally
require a quantitative undergraduate degree. Undergraduate degrees,
even in Economics, in European and Asian universities typically have
much more demanding mathematics content than US programmes. At the
LSE for example, a US BA student wishing to read an economics masters
typically has to do a preliminary year to bring his or her quant up to
speed.

So I wouldn't understate the brains these investment banks command.
They pay far more money than any science or engineering role, and they
get the best people.

Unfortunately that is all working on the 'sell' side. There are
clever people on the buy side, but a lot fewer of them. The ingenuity
is present in markets but asymetrically.

I would recommend Frank Partnoy's 'FIASCO' for a (out of date) view of
the world of derivative products (he worked for Morgan Stanley) and
Nicholas Derman's 'Reflections of a Quant' for the story of a
physical scientist in the 'rocket science' department of an investment
bank.


======================================= MODERATOR'S COMMENT:
Posters to this thread should relate comments to financial planning.

"Elle" <honda.lioness[at]nospam.earthlink.net> wrote in message news:0YsAh.1832$Jl.688[at]newsread3.news.pas.earthlink.net...
- quote -

Indeed. These financial types wouldn't last one minute in
a real engineering curriculum.

--
John Richards, BSEE

On Feb 14, 12:37 am, Will Trice <wwtr...[at]paragondynamics.com> wrote:
- quote -

You and I think alike!

I typed out exactly that post, with that web link, and then deleted
it. Partly because I thought on rereading her post that she might be
referring to something much more specific.

But you are utterly correct 'Computational Finance' is also referred
to as 'Financial Engineering'.

At least in London, FE also refers to any general restructuring of the
corporate balance sheet eg via private equity. But that's a looser
(sloppier) parlance.

"Elle" <honda.lioness[at]nospam.earthlink.net> wrote in message
news:ivkAh.1597$tD2.1299[at]newsread1.news.pas.earthlink.net...
- quote -

There is no formula for evaluating embedded call options in fixed income
securities. Option Adjusted Spread (OAS) analysis is used for comparing
callable and noncallable fixed income securities.

"Will Trice" <wwtrice[at]paragondynamics.com> wrote
- quote -

Good lord. What an abomination of cliché.

But when it comes to language, one often can't fight the
masses, so noted.

Elle wrote:

- quote -

When done analytically, this is sometimes referred to as financial
engineering, see http://mfe.haas.berkeley.edu/.

-Will

Elle wrote:
- quote -

I'm with B on this one, I don't know why most retail investors would
bother with individual munis. There are a few parts to the problem.

One is that the universe of munis is truly enormous. There's something
like 50,000 issuers and 2 million separate issues out there. Compare
this to stocks -- there are few hundred that most individual investors
will bother with. There's free and readily-available information about
any of these stocks and they're discussed regularly in the financial
press. That's not at all the case with munis, there are simply too many
issues out there. Now granted the analysis is different because defaults
are almost nonexistent and a the decision is driven by interest rate
considerations. But that's not a trivial thing to optimize. And I don't
know how I'd assess call risk for an issue from a random county, given
the information available to retail investors.

The next problem, also an extension of the market size, is that most
bonds trade infrequently - every few weeks? Intel, by comparison, trades
many times every second. So "market efficiency" arguments don't hold
quite as well because there isn't enough trading for price discovery, to
use some jargon.

And when you do trade you give up a lot more to transaction costs than
with stocks. It puts some shackles on "portfolio optimizing" that the
institutional manager doesn't have, to the same degree. An interview in
a trade rag recently cited a figure of 3% to 5% of principal in each
direction as being common for retail muni trades, until recently (I've
seen that anecdotally as well). That's a whole year of yield given
up...300 to 500 basis points of cost. That can pay for a lot of years of
muni-mutual-fund management fees and incremental tax costs for using a
multi-state fund.

There are now a few new bond markets, somewhat analogous to the ECNs
that helped drive narrower spreads with stocks. Apparently the spreads
have narrowed. But it's still an expensive security from a transactional
standpoint. Here are the new web exchanges for munis, google should turn
up links - they actually provide feeds to a bunch of public sites:
Valubond
BondDeskgroup
TheMuniCenter

And here's a free site where you can look up daily bond trades, and the
price history for a bond you hold or are interested in buying (enter the
CUSIP:
http://www.investinginbonds.com/mark...e.asp?catid=32

Given those 2 million issues you often don't see a recent trade,
especially on older bonds.

Add all this up and there's a lot to be said for paying Vanguard -- what
is it? -- 12 basis points annually to do this for you? Plus the
state-tax hit. You might still end up ahead, and you'll certainly be
more-diversified. I could easily see losing 50 to 100 basis points on
execution in the individual-muni portfolio, more if you put a price on
the time required to learn how to buy munis and research each issue (and
keep up with them, to determine whether to replace any or not).

-Tad

<beliavsky[at]aol.com> wrote
- quote -

IMO, "expertise" is an overstatement. A formula exists for
comparing that which is callable to that which is not, but
you seem to be neglecting the assumptions on which such
formulae exist. Pricing is fuzzy and mutable, not
scientific.

What we can say IMO is that the parameters of CD prices are
fewer than those of stock share prices, so they're an easier
category of asset to understand.

Evaluation of assets such as stocks, CDs, bonds etc. is not
engineering. Call it "finances."

- quote -

The callable bank CD I have routinely has a price next to it
when I look at my positions in my online brokerage account.
It currently is less than the face value, since, for one,
this callable CD yields less than comparable fixed CDs right
now.

On Feb 13, 7:49 am, beliav...[at]aol.com wrote:
- quote -

I am not advocating callable bank CDs by any means, but most financial
professionals CAN access both sides of the callable bank CD market.
Most, if not all, broker/dealers give us access to them.

You are right in on both accounts in that individual investors cannot
readily see this market and there is little if any benefit over munis,
corps, and bond funds.

On Feb 11, 10:15 am, "Elle" <honda.lion...[at]nospam.earthlink.netwrote:
- quote -

It takes a graduate degree in financial engineering to determine the
fair yield spread of a callable bond over a noncallable bond of the
same maturity. The banks issuing such callable CDs have the expertise,
and individual
investors do not. Individual investors do not see a two-sided market
in callable bank CDs -- they can buy them, but they don't (at least I
don't) see publicly quoted prices at which they can be sold. In
general I recommend that individual investors avoid complicated
products with one-sided markets. There is a two-sided market in
corporate and (to some extent) municipal bonds, so any embedded
optionality in them should be priced fairly. Even in those markets, a
low-cost bond fund may be a better investment vehicle, because a fund
can be better diversified and because in the bond market, unlike the
stock market, the bid-ask spread can be higher for small order sizes.

On Feb 11, 2:43 pm, NotARealAddr...[at]twc-rr.com (don) wrote:
- quote -

perhaps a key point of holding individual bonds is that if you hold to
maturity, then that is somewhat irrelevant to you-- you get the face
value of the bond back at maturity.

(you do have risk there, the risk of what interest rate you get in
reinvesting the coupons on the way, unless it is a stripped bond).


but am not sure how to select an individual bond to purchase. I did
a
- quote -

You'll need a glossary of bond terms

Frank Fabozzi Handbook of Fixed Income Securities is the standard
reference book (but quite technical in parts). I don't know if there
is a more convenient web based one.

Callable is usually bad news for investors-- see Swensen's book on
personal investing. Essentially bonds are usually called if they go
to a premium (coupon rate is above prevailing market interest rates).
So the investor takes the downside (risk of the other way) and not the
upside. For this reason, Swensen recommends a focus on US treasury
securities (If I recall correctly the tax issue is one he talks about
ie municipal tax frees).

The short answer is a bond will normally be called when it is
disadvantageous to the holders, and advantageous to the issuer ie when
interest rates are lower than at the time of bond issue. Although it
sometimes doesn't happen, you should invest on the expectation that it
does.

'Extraordinary Call' I don't know. Usually the issuing prospectus (at
least for stocks, I don't know about bonds) has to be filed with the
SEC (google Edgar) and that will tell you the terms of a call.

As another poster indicates, probably best to stick to non-callable AA
rated municipal bonds or above. If insured, they may have a higher
rating. My take on this (perhaps falsely) is that whilst the leading
municipal bond insurer (MBIA?) *could* default, the impact on the
financial system if it did so would be so large that the US government
would have to do some sort of rescue operation.

http://www.irs.gov/pub/irs-soi/02govbnd.pdf

intro to the sector

http://finance.yahoo.com/q/pr?s=CNCFX

mutual fund holding NC exempt bonds (worth checking the holdings)

http://www.nuveen.com/etf/products/t..._products.aspx

offers some municipal bond closed end funds (for NC)

<beliavsky[at]aol.com> wrote in message
news:1171233912.413729.174710[at]h3g2000cwc.googlegroups.com...
- quote -

This is true of any security, not just stocks. Specifically, since this
thread is about bonds, one should mark to market, and not rely on face
value. That gives the investor an accurate sense of the value of the
investment, with which one can take appropriate action and not blithely hold
to maturity.

I've done the occasional bond swap, because yield curves do not move in
tandem - different parts of the curve move differently, and different curves
(different grades, different types of bonds) also move differently.
Fortunately, I'm working with a broker who keeps an eye out for this kind of
opportunity.

Page describing swaps - what they are, why one would consider them, when one
would consider them, etc:
http://www.investinginbonds.com/lear...catid=4&id=390

Mark Freeland
BnetOnewsX[at]sbcglobal.net

"don" <NotARealAddress[at]twc-rr.com> wrote in message
news:45cf1ef0$0$4838$4c368faf[at]roadrunner.com...
- quote -

An excellent site is InvestingInBonds.com. Their learning section is at:
http://www.investinginbonds.com/lear...?catid=2&id=62

- quote -

07/10[at]100 means that the bond is callable July 2020 at 100 (par). Bond
prices are generally quoted at 1/10 of their value - bonds with a face value
of $1000 are quoted as 100. You need to know this when you place orders for
bonds, because you may order, say, 5 bonds [at]99, meaning that you are buying
5 $1000 bonds at $990/bond.

Bonds are often callable at a premium. For instance, I've bought a muni
bond with a par call 04/15/09, callable 04/15/07[at]101.00. That means that it
may be called in 2009 at face value ($1000/bond), or in 2007 at a premium
price ($1010/bond, or a 1% premium). Unlike CDs, callable bonds often have
this feature that helps lessen the impact of getting called early.

You'll find a fairly good description of a sinking fund at:
http://www.riskglossary.com/link/sinking_fund.htm
Basically, a sinking fund provision requires a bond issuer to buy back part
of the issue periodically. So it is like a call, but partial and whether
you are the lucky one who gets his bond bought back is pure chance.

- quote -

A bond purchased at a premium is more likely to be called. There are bonds
on the secondary market that carry high coupon rates. That higher rate
creates demand for the bond, forcing up its price (and forcing down its
yield); hence the premium on the price. So you are getting a fair yield on
the bond, but from the issuer's perspective, it is paying an above market
rate (the coupon rate). That makes it likely that the issuer will call the
bond when it can.

Conversely, a bond purchased at a discount is less likely to be called.

Read the site, keep asking questions. One other thing to keep in mind about
munis is that many (most?) of the AAA rated bonds are so rated because they
are insured. Local governments with lower credit ratings find it is cheaper
to pay for the insurance than it is to pay more on bonds that get issued at,
say, AA ratings. So muni ratings may not reflect the credit worthiness of
the issuer so much as the insurer. I don't think that's a big deal, but I
think you should know what the rating means.

Finally, if you have a question about a particular bond, post the CUSIP.
(The bond site I gave you provides a history of the buys and sells of the
bond, by CUSIP, on the secondary market.)

Mark Freeland
BnetOnewsX[at]sbcglobal.net

<beliavsky[at]aol.com> wrote
- quote -

I love it when someone takes a sound bite, dismisses the
context (which was important here--you totally muffed the
meaning), and assumes it is the last word. :-)

For the slower witted, my comments above (1) are nowhere
near my entire counsel for when to sell a stock; and (2) do
not apply to an awful lot of people, since I deal almost
exclusively in large value stocks.