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  • jad1148 jad1148 Nov 18, 2011 11:00 PM Flag

    25.16 % per year average for 19 years on Albertson Bonds

    Joe, I ran a 30 year simulation (5/1/2000 to 5/1/2030) in Excel. I'm getting an annualized return of 10.5% and that's assuming every semi-annual interest payment could actually be immediately reinvested by buying additional bonds at 85% of par. Correct me if I'm wrong, but I don't believe it is possible to buy fractional "shares" of a bond. Something else to consider, that bond has a credit rating of B. It's a "junk" bond.

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    • I am correcting you. You did not compound the interest every 6 months. The bonds pay you interest every 6 months.Please reread my original post.I guess you dont comprende If you have $100,000 face value of the bonds-You bought at $85,000 with a coupon payment of 8.7% or $8700 per year. You take $4350 each 6 months and reinvest which would be $5000 more face value of bonds at $87 actually $4350 would buy 5 bonds at $870 per bond-assuming they are still at $87. Agreed after awhile you might not be able to buy at $87 anymore,which would lower your returns,unless you find other bonds paying 10%.But lets assume this since I have already lost you,Just simplify and look at a 19 year compounding table for 10%.It is true you can only buy the bonds in increments of $1000 for one bond. So you would not be able to invest any amounts over $1000. However if you are diversified like me you merely save the amount over $1000 . I have interest from different bonds paying almost every month.Different bonds pay interest on different dates I just reinvest them . My average interest is actually about 11%. So I will beat the 25% assuming no defaultsI know I have lost you. You dont understand compounding. As for B rating yes thats what it is,but I find it a remote possibility that SVU will default.Im sorry!! Im not here to educate people with closed minds.

      • 2 Replies to joenorth0328
      • I stand corrected your first payment would be $4350 and after that each payment would be more if you reinvest the interest. Its kinda complicated figuring year to year. Why not just use a compounding table

      • OK, let's do this one step at a time with paper and pencil.

        On 5/1/2011 you buy 100 bonds at a cost of $850.00 per bond {the assumption for this example is that the bonds always trade at 85% of par}. Your initial investment is therefore $85,000 { 100 X $850.00 }.

        On 11/1/2011 you receive your first semi-annual interest payment of $4,350.00 { 8.7% / 2 x $1000.00 x 100 }.

        You immediately spend that payment by reinvesting it, buying an additional 5.1176 bonds { $4,350 / $850 per bond }.

        On 11/1/2011 you now own 105.1176 bonds.

        On 5/1/2012 you receive your second semi-annual interest payment of $4,572.62 { 8.7% / 2 x $1,000.00 x 105.1176 }.

        You immediately spend that payment by reinvesting it, buying an additional 5.3796 bonds { $4,572.62 / $850 per bond }.

        At the end of one year you own a total 110.4972 bonds with a market value of $93,922.62 { 110.4972 x $850.00 }.

        Your annualized total return after one year is 10.5% { ( $92,922.62 / $ 85,000.00 ) - 1 }.

 
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