Strange bond yield behavior?

[DavidJ]

Hi!

I'm in the process of converting my system from FM v.9 to v.10. To do so, I am manually adding the Investment Properties/Income tab data, so that I can get a Current Yield field in custom reports.

For stocks, everything is working fine. For bonds, to make the numbers come out right, I have to multiply the coupon exactly by 10. In other words, for a bond with a 2% coupon, I have to enter 20 for the Current Yield field to return "2.00".

I don't know if this is relevant, but if I buy $10,000 worth of bonds, I don't enter them as $100 (price) * 100 (units), as many people would do, but $1000 (price) * 10 (units). I don't see why this should make any difference, though.

Happy New Year, everyone!

Thanks.
David.

[Mark]

Hi David,

The "current yield" is defined as the annual payout as a percent of the market price on the ending report date. For example, if a bond has a coupon rate of 8% and the current bond's share price is 95, the current yield is 8.42%. If your price is 950 instead, then the current yield will be 0.842%.

Bond coupon payments are calculated by multiplying the face value times the coupon rate. The face value is 100 times the number of shares owned. Basically, Fund Manager is assuming you record the shares as 1/100th of the face value, and the price near 100 (percent of par), not 1,000.

Is there some reason you're recording your bonds with a price near 1,000 instead of 100?

[DavidJ]

"Is there some reason you're recording your bonds with a price near 1,000 instead of 100?"

There are historical reasons for my having picked 1000, but it might be more to the point if I explained the basic problem; it might give you some ideas for future versions of FM.

Both of my brokerages use the same system for listing positions in both stocks and bonds. There's a column marked "quantity" and a column marked "price".

For stocks, the meaning of the values is simple, and therefore entering them in FM is simple. "Quantity" is the number of shares, "price" is price/share. I enter them both, and FM correctly computes the value of the position and anything else it needs to compute.

For shares, what appears in "Quantity" is the par value OF THE ENTIRE POSITION, not of one unit. What appears in "price" is, in effect, a percentage of par MULTIPLIED BY 100. Unless things have changed since I started using FM with v.5, if I try to enter them into FM as I get them from my broker, FM will multiply them just as it does with stocks and will create a position 100 times bigger than it should be. Therefore I had to make some decision as to what to change arbitrarily, and I decided that "one bond" would mean $1000 of par.

(Just in case anyone is curious, there were several silly reasons for this:
1. The increment for buying many bonds from many retail sources, and sometimes from the issuer, is $1000.
2. The old paper bearer bonds, which pretty much no longer exist, were usually issued in units of $1000.
3. There are still a few sources, such as MuniCenter and Fidelity's online bond search gadget, which treat $1000 of par as "1 bond". Look in the columns about offering availability and increment.)

Just for clarification: Treasury Direct presents its data using the same system, with a very slight variation. As for a precedent for a retail portfolio tracker allowing one to enter the bond data exactly as it comes from the broker, with "quantity" representing the par value of the whole position and "price" representing the traditional bond units, the late lamented MSN Portfolio Tracker worked that way for the last few years.

By the way, I assume that the problem exists only for people who enter their data manually.

Thanks.
David.

[DavidJ]

I have run into a few other problems in trying to enter meaningful data about future distributions, and I have found rough workarounds for all of them but I'd like to know:

Mark, are the future distribution data entered in the "Income" tab used for anything except Current Yield and YTM? If so, could could you list the fields for which they are used, so that I can know if I caused any damage by my other arbitrary decisions?

Thanks again.
David.

[Mark]

Hi David,

I understand your broker lists quantity as the par value. When FM retrieves from brokers, it handles this automatically. It sets the shares to 1/100th of the face value, and the price is a percentage of par (around 100). When you retrieve bond pricing, the prices will be around 100, so this all works out. You could probably make life easier on yourself if you used this same approach when manually entering bonds.

The "Income" tab is used for calculating the "Bond Summary" and "Income Schedule" reports. These fields are also used for calculating Current Yield, YTM, and accrued interest. Accrued interest also effects all of your yield calculations. You can turn this off, but by default, accrued interest is factored into your yields.

[DavidJ]

"You could probably make life easier on yourself if you used this same approach when manually entering bonds. "

Yes, I'll do it that way.

Thanks again.
David.