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I have a ton of money in a checking account earning 0% interest. I thought about buying 3-month CDs with 2.25% interest (or 0.56% per 3 months), something short term so my money isn't locked up for long in case I need it.

However, I found high-yield corporate bonds for sale at by broker. I am very new to bonds, so I don't really know how it will work for me.

I screened for bonds that have maturity dates at around 3 months. Here is an example of one I found, a 10-year bond that just happens to be maturing in about 3 months:

Coupon: 7.175 Fixed
Issue Date: 06-18-2009
Maturity Date: 06-18-2019
Details: TELECOM ITALIA CAP S.A. Non Callable, Make Whole Calls, TELECOM ITALIA S.P.A. CUSIP: 872456AA6
Credit Rating: Ba1/BB+
Industry: Telephone
Price: 101.400
YTW: 2.122
YTM: 2.122
QTY/Min:270/50

My broker says that if I were to buy 50 of them today (3-4-2019), the costs would be this:

Principal: $50,700.00
Min. Qty: 50
Settlement Date:03-07-2019
Accrued Interest: $787.26
Total Cost: $51,487.26

If I buy these bonds and wait until the maturity date, which is 3 months later, how much would I earn dollarwise? Is it actually the YTM: 2.122% for just 3 months, or is 2.122% an annual rate where 0.53% would be my actual 3-month earnings?

peppy
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1 Answers1

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The YTM is an annual rate, but note your effective rate would be better than the 0.53% you calculated because you actually have 107 days from the quote date until maturity instead of 3 months. You can approximate your actual rate of return during those 107 days with the formula 107/365 * 2.122% = 0.622%. But since you're settling 3 days later, the rate is actually slightly worse because you'll pay 3 more days of accrued interest.

Since you know the accrued interest, and it looks like this bond pays twice per year (which most do), you can calculate the actual rate of return like this:

  • Bond value at maturity: $50,000 * (1 + 0.07175/2) = $51,793.75
  • Amount you will pay: $51,487.26
  • Profit = $51,793.75 - $51,487.26 = $306.49
  • Return % = $306.49 / $51,487.26 = 0.595%

In this case it looks like you'd be better off from an APY stand-point with the 3 month CD at 2.25%, though you'll be limited to about 90 days. But check out high yield savings accounts too; oftentimes they are comparable to 3 month CD rates, and you have much more flexibility. (After a quick search I just found some at 2.20 and 2.25%.) Note that the effective rate on 107 days in a 2.25% savings account would be 0.660%, which is better than the bond.

TTT
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