- These small-denomination bonds are aimed at ordinary investors who may not have a lot of money to put into standard bonds.
- Municipal issuers or government-issued savings bonds are the most popular kind of baby bonds.
Is it wise to invest in baby bonds?
Benefits of Baby Bonds Bonds with lower prices have more liquidity. Because they trade on a stock exchange, they have a low credit risk. Increased liquidity. The more liquid an investment is, the faster it can be sold (and vice versa), and the more easily it can be sold for a fair price.
What does the term “baby bond” mean?
A baby bond is a bond with a face value of under $1,000. These small-denomination bonds are aimed at ordinary investors who may not have a lot of money to put into standard bonds. Municipal issuers or government-issued savings bonds are the most popular kind of baby bonds.
What is the procedure for purchasing baby bonds?
Savings bonds from the United States are one of the few assets that minors, including infants, can own in their own names. A U.S. savings bond can be owned by any citizen or resident of the United States who has a Social Security number, regardless of age. If you wish to give a savings bond to a newborn, you’ll need to utilize your Treasury Direct account or your tax refund to purchase paper Series I bonds in the baby’s name.
Are dividends paid on baby bonds?
The same as equities traded on a stock exchange. A baby bond is a bond that has a face value of less than $1,000. This is usually $25, $50, or $100. Notes, Senior Notes, Debentures, Junior Debentures, and a variety of other terms are used to describe them. Baby bonds are nearly typically unsecured, though some utility baby bonds are secured by utility assets, hence they rank ahead of common and preferred shares in the capital stack, but below secured debt.
In the issuing prospectus of some preferred stocks, there is a condition that states that if the issuer does not redeem an issue by a specific date, the coupon will step up to a higher rate until the shares are redeemed.
This isn’t a typical provision, although it does pop up again and then as a way to make a new issuance more appealing to investors.
Many preferred shares feature provisions for holders to redeem their shares if a company is bought or someone buys a controlling interest. Because of this clause, even if an issue is not technically redeemable by date, it is feasible that it will be redeemed early as part of a merger or other transaction.
The declared percentage of debt or preferred stock that the corporation will pay.
The dividend is computed by multiplying the coupon percentage by the issue’s face value (e.g., 8% X $25 = $2.00/year or 50 cents weekly).
The current yield of a preferred stock is the current yield (%) on the shares based on the current share price.
Dividends are payments made to you as a result of owning common or preferred stock.
Dividends are frequently eligible for favorable tax treatment from the United States government, and are taxed at the lower capital gains rate.
REIT, MLP, and BDC dividends are not eligible for preferential tax rates.
While many investors use the term “duration” to refer to the time it takes to reach maturity, this is only “kind of right.” Duration is a measure of how sensitive a fixed-income investment’s price (the value of principal) is to changes in interest rates. The length of time is measured in years. Bond prices fall when interest rates rise, while bond prices rise when interest rates fall.
This clause permits a corporation to sell stock in order to redeem a bond issuance before its maturity date.
Allowing a ‘clawback’ of up to 35 percent of the issue by selling shares is common practice.
This is the day when the securities stops paying dividends and starts trading without them (ex-dividend). On this date, the security’s price will typically trade at a discount to the previous day’s closing price equal to the dividend amount.
When allowed, the risk that a preferred stock or baby bond will not be called at the earliest available date.
Preferred stock and baby bonds are occasionally issued with a fixed rate for the first five or ten years before switching to a floating rate.
A preferred or baby bond that pays a fixed rate of interest/dividends for 5 years before being reset every 5 years at the guaranteed “spread” plus the 5-year treasury rate until redemption (if any).
“Floating rate” coupons are sometimes used in both preferred stock and baby bonds.
These are usually adjusted every three months and are based on a base rate and a floating rate (such as 3 month libor). There is usually a minimum coupon rate on these.
When a firm “prices” a new stock or bond offering, it files a paperwork with the Securities and Exchange Commission (SEC). Also known as an FWP. Companies can also utilize it for any number of various items they need to file with the SEC, as the name implies.
Interest is the compensation you receive for “lending” money to a corporation by purchasing its bonds.
Interest received in the United States is not eligible for special tax treatment and is taxed at ordinary rates.
Investment grade equities are those that are rated at or above BBB- by Standard and Poor’s and at or above Baa3 by Moody’s.
Credit rating information can be found here.
The majority of preferred stocks are unrated or have ratings that are below investment grade.
These are referred described as “trash” by us.
While the asset may not be “junk,” any security that is not investment grade is referred to as such.
The amount that will be paid to the holder at the time of redemption.
This is usually $25 (but it can be $50, $100, or $1000 in some situations).
In the event of a call or redemption, a’make whole’ provision means that the investor will get the net present value of a future stream of payments.
Some preferred companies pay their dividends on a monthly rather than quarterly basis.
Some investors prefer to get monthly dividends because they require regular income.
Monthly payors have a modest annual advantage over quarterly payors in terms of math.
If a board of directors fails to declare a dividend, the company is not obligated to pay the dividend in the future. Non-cumulative preferred stock is typically issued by banks and insurance businesses, and it is not permitted to be used as Tier 1 capital.
On the balance sheet of the issuer, the value ascribed to an issuance.
While many people mistakenly believe that most preferreds and baby bonds have a par value of $25, this is untrue.
The true ‘par value’ is frequently 1 cent.
In prospectuses, the term “pari passu” refers to securities that are “equal” in terms of ranking in the case of a liquidation.
Within the capital stack, most preferred stocks are “pari passu,” which means that if a business has five issues outstanding, they all rank equally, regardless of when they were issued.
Only a few (very few) preferred stock issuance are “participating.”
This means that preferred stockholders will be able to “participate” in earnings above and beyond the specified coupon rate.
A penalty (or bonus) coupon rate is paid on a few preferred issues if shares are not redeemed by a specific deadline.
While theoretically perpetual in terms of maturity, these shares are more commonly referred to as term preferred.
This implies that there will be no maturity date.
Because most preferred stocks have a maturity date, the issuer is not obligated to redeem the shares at any time.
The document that lays out the exact parameters of a stock or bond issue and is filed with the Securities and Exchange Commission (SEC).
Distributions and dividends that are eligible for favorable tax treatment on your income taxes are referred to as “qualified distributions and dividends.” This means that instead of paying the regular tax rate, you will pay the lower capital gains rate. Typical preferred stock issuers who pay eligible distributions are banks and insurance businesses. Non-qualifiable dividends are paid by REITs, mlps, and BDCs.
After a set amount of time, the issuer has the option to redeem (or call) the shares at a preset price.
For example, most preferred stock is “redeemable” at the issuer’s option 5 years after issuance for $25 plus accrued dividends. Note that the issuer has the option to redeem the shares, and whether they are redeemed or not is dependent on current interest rates. If interest rates rise, fewer issues will be redeemed; on the other hand, if interest rates fall, corporations will redeem issues so that they can reissue at a lower coupon and save money.
The date on which a preferred stock can be redeemed at any time. This is usually roughly 5 years after the prospectus was issued, but it can be any amount of time specified in the prospectus.
There are just a few preferred stock issues with mandated redemption deadlines, which we refer to as “term preferreds.”
They are similar to all other preferreds in most ways, but instead of being “perpetual,” they have a “date certain” for redemption.
Voting rights are rarely extended to holders of baby bonds and preferred stock, which are reserved for common stock stockholders.
It should be emphasized that if a corporation fails to pay a preferred stock dividend, the preferred stockholders may elect a set number of board members. In actuality, this is rarely a consideration in a preferred stock offering.
What is the mechanism of baby bonds?
Baby bonds are a government program in which every kid is given a publicly financed trust account at birth, with lower-income families receiving more generous funding. The strategy was developed by economists William Darity and Darrick Hamilton in 2010 as a way to close the racial wealth gap in the United States. According to Naomi Zewde’s 2019 analysis of the idea, baby bonds would reduce the median racial wealth difference between white and black young Americans from 16 to 1.4.
The term “baby bond” can also apply to a bond with a par value of $1,000 or less in American English.
What is the frequency of interest payments on baby bonds?
Debt that is traded on an exchange Notes and bonds that are exchanged on stock exchanges rather than bond markets are known as securities. The majority of ETFs have maturities of 30 years or more (although some are just 5-10 years). The majority of these securities pay interest on a quarterly basis. The majority of ETF debt issuance are ‘junior’ to the company’s secured debt and’senior’ to preferred and common stock.
The majority of the issues are $25.00/share issues that are callable 5 years from the date of issue for $25.00 plus accrued interest.
When the 5 year first call date approaches, caution should be applied when purchasing these debt securities.
Companies will’refinance’ as much debt as possible at lower interest rates in an environment where interest rates are declining.
If you buy at a price higher than $25, you will lose money if the issue is called.
It’s worth noting that investment-grade debt makes up a sizable portion of the exchange traded debt market.
Because these issues are essentially similar to preferred shares (except that they are one level higher on the ‘claim’ ladder in a bankruptcy), they are good problems to explore for folks who enjoy preferred shares.
It’s worth noting that the payouts on these instruments are treated as interest, so they’re not eligible for the lower qualifying tax rate.
Are baby bonds considered safe?
Despite the fact that ECC is a CEF, it invests in CLOs (collateralized loan obligations), a riskier asset than most other CEFs. Although the baby bonds are unrated, they are exceptionally safe due to their leverage limits and additional equity protection provided by ECC’s preferred stock (ECCB). Although CEFs are allowed to operate with up to 50% leverage by law, ECCs tend to operate in the 35 percent leverage range, whereas baby bonds currently have a leverage of just 28 percent when preferred stock is added to common equity.
ECCX and ECCY are unique in that they are the only baby bonds that have ever been issued by a CEF. As a result, they are safer than “A1” rated preferred stocks because they are bonds, which are higher up the capital stack than “A1” rated preferred stocks. The fact that ECCX is a bond would be less important if ECC had no preferred stock. However, because they have preferred stock, ECCX and ECCY have preferred equity protection, which none of the “A1” rated CEF preferreds have. In addition, unlike preferred stocks, dividends on bonds cannot be suspended. A CEF “bond” appears to be practically indestructible because a CEF “preferred stock” has never defaulted. Given CEF leverage restrictions and the historically faultless track record of CEF preferred stocks, ECCX/ECCY, which are protected by both common and preferred equities, would need ECCB preferred stock to be completely wiped out before being harmed.
How do I get my baby bonds back?
- Whether you have a local bank account and it accepts savings bonds, inquire if it will accept yours. The answer may be contingent on the length of time you’ve had an account there. If the bank will cash your check, find out if there is a monetary restriction on redemptions and what kind of identification and other documentation you’ll need.
- Send these, along with FS Form 1522, to Treasury Retail Securities Services (download or order). The bonds are not required to be signed. You’ll need to verify your identity. The instructions are on FS Form 1522, in the “Certification” section. Our address is also included in the form.
What does a BDC baby bond entail?
Baby bonds are debt offerings with a par value of less than $1,000 ($25 for most corporations, including BDCs) that have priority over common and preferred shares in the event of a liquidation. Baby bonds have more liquidity than normal bonds and are traded on the New York Stock Exchange or the OTC market. The majority of baby bonds pay interest every three months, and many of the longer-term bonds are rated by major rating agencies such as Standard & Poor’s, Fitch, Kroll, and Moody’s.
I’m always keeping an eye on BDC balance sheets, which provide insight into bond risk factors like as portfolio credit quality, changes in leverage, asset/interest coverage ratios, and redemption risk, as highlighted in the GAIN Deep Dive report. This information, as well as essential concerns such as asset and interest coverage comparisons for risk assessment, will be discussed in future publications.
Baby bonds and preferred shares typically have lower returns and are not expected to outperform the S&P 500 or BDC stock purchases, but they will easily outperform during periods of high volatility and/or downturn while still providing a relatively safe and stable yield due to their seniority over common stocks.
Bond pricing is influenced by predicted investment rates, which include non-investment grade debt and the ‘BofA Merrill Lynch US Corporate B Index’ (Corp B), which rose to 8.45 percent on December 26, 2018.
These yields have been dropping in 2019 and are currently about 5.75 percent, as discussed in prior articles. This is significant for a variety of reasons, the most important of which is that it indicates whether investors predict greater (or lower) rates on non-investment grade debt.
What is the value of a $50 savings bond?
A $50 EE bond, for example, costs $50. EE bonds are available in any denomination up to the penny for $25 or more. A $50.23 bond, for example, could be purchased.