On money

Understand the numbers behind corporate bond prices

Personal Finance editor HELEN HUNTLEY E-mail: Click here Archive

By HELEN HUNTLEY

© St. Petersburg Times,
published October 28, 2001

Understand the numbers behind corporate bond prices

Q. I purchased $9,000 worth of corporate bonds through my broker, who told me that each bond cost $1,000. When I received my confirmation, it showed "quantity 9,000" and "price 100." I questioned the broker about this and she said it was correct. When I asked her to send me some written information on the bonds, she said there wasn't any. What should I do?

A. I'll bet you were expecting something logical such as "quantity 9" and "price 1,000," but that isn't the way bond prices are quoted. The price you see on confirmations and statements represents a percentage of the bond's face value. The "100" means you bought your bonds for 100 percent of face value.

Of course, bonds don't always trade in nice round numbers. You might, for example, see your bond quoted at 100 1/8. That would mean it was priced at 100.125 percent of face value or $1,001.25 per bond.

If you ever buy Treasury securities, you will find that they are quoted a little differently. Instead of a number followed by a fraction, you will see a number followed by a colon, such as 105:12. The numbers after the colon represent 32nds, so 105:12 translates to a price of $1,053.75 for a $1,000 bond.

You should expect your broker to provide you with important details about a bond such as the maturity date, coupon rate, payment dates, credit rating and any call provisions allowing the issuer to redeem the bond early. For bonds selling for more or less than face value, the broker also should tell you the current yield and the yield to call.

If the company issuing the bond also has publicly traded stock, your broker might be able to provide you with a research report done by one of the brokerage firm's stock analysts. Or you could research the company yourself, either online or at the public library.

Q. What is the best way for a small investor (about $200,000) to pay a broker or a financial planner? Should it be a straight commission, flat hourly rate, percentage of assets under management or payment for specific services?

A. There are good brokers and financial planners who work under each of those arrangements. Some offer clients a choice of payment plans or use commissions to offset fees.

The basic problem with paying by commission is that it creates a potential conflict of interest: The broker or planner doesn't get paid unless you trade, but trading may not be in your best interests.

If you want a plan and some advice but would just as soon implement and monitor the plan yourself, paying an hourly rate or a set fee makes the most sense. If you want ongoing advice, a percentage of assets under management may be best.

Q. I have mutual fund shares in my IRA that are very low in price. Would I save on taxes by withdrawing those shares and putting them in a taxable account? Or should I leave them in the IRA? I am in my 60s.

A. Generally, you are better off leaving your money in your IRA as long as possible. To be more specific you would have to run the numbers, which means you would have to know what tax bracket you are in now and you would have to project what tax bracket you will be in in the future and what the investment is likely to do between now and then.

While withdrawing the shares now might cost you less in income taxes, the savings would be offset by the fact that you have to pay the taxes sooner. You would lose the use of that money and the investment return it could be earning. Assuming you sold shares to pay the taxes, you would have fewer shares getting the benefit of any future gains. And any future appreciation you did earn still would be taxed when you sold, albeit at a lower capital gains tax rate.

The withdrawal scenario could leave you better off in some situations. For example, if you tapped some other source of funds to pay your taxes instead of selling shares, the net result would be increased savings. Or if you "arranged" to die with the shares in your taxable account, your heirs would avoid capital gains tax on any increase in value between the withdrawal and your death.

Online money map

Looking for help getting your money organized? Check out OnMoney.com. The site offers educational information, portfolio management and the ability to compare quotes from insurance companies and mortgage brokers.

© 2006 • All Rights Reserved • Tampa Bay Times
490 First Avenue South • St. Petersburg, FL 33701 • 727-893-8111

Contact the Times | Privacy Policy
Standard of Accuracy | Terms, Conditions & Copyright