Financial Ratios and Statistics – FahStats

Archive for June, 2010

A savings bond is a treasury security for investors. In essence, investors are loaning the government money. They are issued both as paper bonds and electronic savings bonds. They cannot be traded but can be redeemed after only one year. There are no dividends, per se, with a savings bond, as the interest payments are simply added on to the value of the bond, but as tax-deferred items, the interest doesn’t have to be reported to the government until the bonds are cashed.

The value of a savings bond varies with the kind of bond purchased – series A, B, C, D, E, EE, F, G, H, HH, I, J and K. It also depends on when it is cashed and what kind of interest it has been assigned. Since 1935, the treasury has issued savings bonds in alphabetical progression. For example, series A bonds were offered the first year, Series B bonds followed in 1936, Series C ran from 1937-1938, and Series D were issued from 1939-1941. Series E bonds, longest running of the treasury savings bonds, ran from May 1941 until they were discontinued in 1980.

Series EE bonds were brought out in 1980 to replace the series E. They can be purchased at half or full face value. They come in amounts between $50-$10,000, and carry a maturity date of between eight to thirty years. Those cashed in before the fifth year are penalized three months’ worth of interest. If EE bonds are purchased through a bank or other financial institution, it is also known as a Patriot Bond. There were more kinds of savings bonds, including the series F and G (which were offered to all investors except banks), series H, HH, Series I, J and K.

How do we calculate the value?

The value of a savings bond can be calculated by taking note of the face value of the bond, the interest rate from the time the bond was issued until the present time, and whether there are any penalties that have to be deducted. In addition, it is important to note that a bond that is issued at half the face value will be worth the face value at maturity, while a bond that is issued at face value is worth twice this amount at the time of maturity. Savings Bonds can also increase in value if they are redeemed past their maturity date, in which case the interest must be calculated on a year-to-year basis.

If you want to make good money with banks, or any institution, Government and agency bonds are where it is at. Simply because all Government bonds and agencies are AAA rated, and banks can buy millions of dollars of any bond without incurring any credit risk.All banks own bonds of some sort, and they are buying them from brokers. Our primary bonds are: U.S. Treasury obligations (T-bills, T-notes, T-bonds) Government Agency Debt (GNMA) Private Agency Debt (FNMA, FHLMC, FHLB and others) Mortgage Backed Securities (Pass throughs , CMO’s, ARM’s) Municipal Bonds Investment Grade Corporate Bonds
The institutions that have strict policy guidelines on the bonds that they can buy are Banks, Credit Unions and Municipalities.The spreads on Treasuries make them difficult to sell or “mark up” more than a few “ticks” to most sophisticated banks and institutions. A tick is 1 point in price. Government bonds are quoted in 32nds.An example of a treasury bond would be: Bid 101-16 Ask: 101-24. If your client wanted to buy $10,000 of this treasury bond, you would see the price to you at 101-24 (24/32). 24/32 = .75. So the price is really 101.75 or $10,175. Each point represents $10 for every $1000 par bond. For $10,000, each point is worth $100. All bonds trade at a minimum of 1000. Institutions normally buy $250,000 up to tens of millions per trade. So, our example of a $10,000 trade really isn’t realistic and would not be worth your time. A “tick” by the way, is if the price went up to 101-25.Trading for a few “ticks” on $100,000 would make you very little. If you factor in ticket charges, you might make $100 on the trade. You only present treasuries if it’s non competitive, or if the client is investing at least $1,000,000, otherwise it won’t make you much. If your client deals with 3 other brokers on treasuries, you will all be fighting for very little money. It’s very easy to get a quick quote on treasuries. Every major dealer owns them, and they can be purchased quickly. You or your trader will contact a major brokerage firm (Merrill Lynch, UBS etc.) and buy them. Not much money yes, still, it is assets you are controlling, and it could be used as available money to swap out of into a better investment for the client.Treasuries are very safe of course, that’s why they are bought. Only buying treasuries will diminish the rate of return of the entire portfolio, if that is their only or main investment vehicle. Treasuries offer flexibility though. The market values on them will normally hold up well over time. They are very liquid and can be traded instantly. You should sell them only as “time bucket” or maturity gap placing.If you see the bank has nothing maturing in the first half of a year for instance, you can recommend treasuries there too. Remember, institutions are looking for best price, but also good advice. The medium sized banks ($50 million – $500 million assets) will value good planning and thoughtful recommendations over dealing with 10 brokers all day. The larger institutions are more complicated, and require more price awareness. They think they have the ideas covered and you may have to just be an order taker with them. How To Sell Mortgage Backed Securities or CMO’s Mortgage backed securities offer the best alternative to decreased loan demand. Pass throughs, CMO’s and adjustable rate MBS’s are paid to the bank just like a loan that the banks has made for a mortgage. If a person takes out a $250,000 mortgage, the customer is paying back the bank monthly with principle and interest. As you know, if you own a home, your initial payments are mostly INTEREST in the early years. A mortgage backed security, if it is a new issue will operate the same way.Length of the outstanding mortgages, or current face of the mortgages are a factor. “Seasoned pools”, as they are called, are mortgage pools that have had several years of payment on them. They have more predictable payments and duration. They will normally pay better because of that. Seasoned pools are usually what banks are looking for. They are generally interested in better cash flow and predictable cash flow.The compensation or mark up potential is good in mortgage backed bonds. They are priced above treasuries because, although they are AAA rated, they are not absolute in their pay off and the payments fluctuate. Since they are usually 15-30 years in duration, they allow for price mark up. Where treasuries and straight agency debt allow for a few ticks to a .25, MBS’s can create spreads between buying and selling them up to a ? or ? of point. This can translate to a $5,000 commission on a $1 million sale. Remember, a million dollars in one bond is not unusual for most institutions, and for banks over $500 million in assets, it’s normal.Other Types Of Institutions To Sell Bonds to:There are other institutions that buy bonds of course. However, other institutions for the most part can buy other competitive investments, and deal with other brokers in those areas. Also, many of these others hand over portions of their major assets to professional money managers. Banks, CU’s and municipalities only buy fixed income, so their entire portfolio is available to you. They also will very rarely turn their entire portfolio over to a 3rd party. That is not the case with some of these others. They would include:Insurance Companies
Foundations
Universities
Hospitals
Pension Funds
Cemeteries (Yes, even them)Ultimately, these accounts can buy almost any type of bond. Corporate bonds can be offered as well. Still, your opportunities are spotty in with these accounts. Information or lists of these types of accounts can be obtained through directories or other sources.Focus on the Financial and public institutions. They will be a much higher percentage play for you to sell bonds.Good Luck!

Many people have asked me if I have a budget for my family every month. The answer to that is no. I don’t believe in having a budget because it is like why many people fail to lose weight. People fail to lose weight because they set up too much at one time a expect a lot a results instantly.With a budget this also can happen so this is what I do to succeed. I pay myself first before I do anything. What!! not pay bills first? That is right I pay myself into a ROTH IRA and into my TSP account before I do anything else.Next, I pay my bills which includes DirectTV,DSL, telephone,heating/elec, and my insurances like car etc. (SGLI comes out of my paycheck automatically). Then we usually go shopping and say how much we are going to spend on this trip to the supermarket.We always have a shopping list but I do buy an extra $10-20 off that list on canned goods for food storage. (More about that later). I then put some money in my ING DIRECT account for an emergency fund. I do have a little left over for things like milk, fresh fruit,veggies, and gas.I don’t budget I just live under my means which a lot of people don’t do. If I want some coins or a new computer or something like that I start putting the money away and save for a few month until I have the money.