Welcome. You’re listening to the FinTrust Capital Advisors From The Desk Of Podcast: our podcast about markets, life, and things financial. In today’s podcast, Donna Rasile, Senior Vice President, Investment Advisor, and Dave Lewis, CFO, Senior Vice President, Investment Advisor, discuss the inner workings of bonds.
Donna: Welcome. You’re listening to FinTrust Capital Advisors From the Desk Of podcast; our podcast about markets, life, and things financial. In today’s podcast, we will discuss the inner workings of bonds. Given we are in a more attractive interest rate environment, we’re working with clients to help build portfolios that include different types of bonds to capture attractive yields. In particular treasury bonds. I am Donna Rasile, Senior Investment Advisor at FinTrust Capital Advisors, and excited to bring to you today my interview with Dave Lewis, our Chief Operations Officer and Investment Advisor that specializes in the fixed income markets. Dave, looking forward to our conversation today.
Dave: Thanks, Donna. It’s great to be with you today and I’m looking forward to our discussion. With the recent rise in yields, fixed income and bonds have become a lively topic.
Donna: So Dave, can you share for our listeners today a high level look at how bonds work?
Dave: Sure. In simple terms, a bond is an obligation where one party borrows money from another party for an agreed upon time and an agreed upon interest rate known as a coupon.
Donna: Great. Thanks for sharing. When you go to purchase bonds on behalf of our clients, can you tell us a little bit about what that process looks like?
Dave: Absolutely. The first part of the process is understanding the risk a client wants to take. We, and most of our clients, prefer to take a minimal amount of risk. So, we typically recommend treasury bonds. Next is the time horizon for a client, or how long they want to invest their money. Is it one year, five years, or six months? And of course, we need to determine how much they want to invest. Depending on the circumstances, there may be other factors that we need to consider, but once we have determined those items, we will search for bonds with the highest yields.
Donna: Great. A lot of our clients are buying bonds right now to capture the interest payments. What is the difference between the coupon of the bond and its yield?
Dave: That’s a great question. That is the part that can be confusing to a lot of people. The coupon is the rate at which the bond pays interest. Typically, interest payments are made every six months, or twice a year. The yield is annualized total return of a bond. So, the yield will include both the coupon and any appreciation in the price of the bond.
Donna: OK, so when do you buy a bond at a discount? And also, what does par value mean?
Dave: That is an important item to discuss. Because yields have been rising recently, most bonds traded a discount to their par value, which is typically stated at $100. The current one-year Treasury yield is about 5%. Many bonds in the market have a coupon lower than this because they were issued in a previous year when yields were lower. So, one-year treasury bond with a 2% coupon will trade at a discount, probably around $97.00. The coupon of 2% plus the price appreciation of $3 will get us a yield of around 5%.
Donna: Great. Holding a bond to maturity does allow for you to get your principal back plus the interest. However, if you needed to sell the bond prior to its maturity, is that possible?
Dave: The short answer is yes, but we typically recommend that you do hold the bond to maturity. Treasury bonds are very liquid, meaning that they are traded frequently. Your return might be negatively affected, but unless there is some unusual circumstances in the market, you typically can sell your bond prior to maturity without a negative consequence.
Donna: Great. Well, Dave, thank you so much for your insights and education on this timely topic. You did a great job addressing several of the characteristics of bonds and how they work. At FinTrust, we strive to deliver thought leadership to our clients with the goal of having our clients understand why and how we design their portfolios and their investment solutions. Thank you for joining us and we look forward to our next from the desk of conversation.
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