If held for all 19 years.I bought the 2030 8.7% Albertson Bonds at an average price of about 85 giving me over a 10% real yield. So even if they are at 85 in 19 years I still get my 10%. Going to a compounding table for 10% compounded every 6 months we get a $538.55 gain on a $100 investment or $638.55 total including a original $100 investment.If you divide $538.55 by 19 years my average gain per year would be $28.34 or 28.34% on $100. Comprende??? This is with simple compounding. Forget YTM. If you add add in $15 gain from $85 to $100 par and total is $653.55 on a $100 investment would make it slightly more than 28.34%. Forget that. Take 28.34%. Thats what I would get average for 19 years if held to maturity 2030. For you if you bought now at $95- the actual yield at $92 on 8.7% yield is only about 9.45% if you bought now.Using this 9.45% we get a $477.98 gain on $100 or $25.16 average a year or 25.16% a year. So I apologise my original figure of 24.6% a year was a little low . Now if you cant figure this out I feel sorry for you.I used simple online calculators. Will TLT get 25% a year. Hahaha
I think your thesis is incorrect and dangerous:
1) you can't compound at 10%, because
a) you only will be getting an 8.7% coupon, the rest is accrual, not cash and can't be reinvested;
b) compounding assumes that every 6 months you can re-invest cash flows at the same terms, for the next 19 years > good luck with that;
c) you will have to pay full taxes on both the coupons and accruals
2) You said "even if I have it at 85 at maturity" - well, what if you have it at 50? 30? or even zero? This bond has been discounted for the good reasons - it has elevated credit risk because the issuer has poor and declining financial health. If it goes bankrupt, good luck with figuring out your rate of return.
(Disclosure: I am short TLT, but that's a different matter).
As to no 1 no bond interest is not accrual it is paid to you every 6 months-you simply reinvest that interest. Yes if the price of the bond goes up you will not get as high a return. Yes the interest is taxable and all gains-when you sell-duhh as with stocks also yes bond interest is taxed at a higher rate than ordinary dividends No 2 Youre wrong again IMHO Albertson has good credit risk and it has been paying down debt Problem with TLT is it is so low an interest rate-below inflation and high principal risk as the economy improves interest rates will go and your principal goes down
Hope you guys don't mind a question. I've been investing in equities including options for a decade. Now have decided to start looking into fixed income. I completely understand your analysis of the Albertsons 8.7% bond analysis that you so clearly made. I am assuming that this economy has farther to drop - I expect the Dow to drop below 11,000. But it will turn in the next two years - my guess. When you did your analysis, how did you account for prevailing interest rate trends - both short and long term. My guess is that rates will not go lower short term and will eventually start ticking up. How does one play the bond market with the expectation of rising rates?
Any and all help will be greatly appreciated. Disclosure: I am long TLT as of a week ago. It is a short term trade for me. It's up huge, but I think it has more legs because of the implosion in Europe. The tricky thing will be knowing when to pull the trigger and get out. I am hoping for a couple of months gain.
Of course your first few years you will only get about 10% but TLT is an anemic yield and fluctuates wildly. 3% does not even cover inflation- And taxes.And inflation will eventually come back. TLT is only for trading IMHO.
I agree, anyone who buys TLT is risking a huge principal risk and an anemic rate. Go with good high yielding and medium yield bonds. 25% a year is much better than 4% over 19 years. Albertson is part of Supervalu and is doing well. beat the last qt earnings estimate and is paying down debt. Look also at Cincinatti Bell and Appleton Papers and investment grade Genworth. 10% compounded will also beat SPY over the long run