This Post is designed to speed my analysis of comparing the Trust Certificate IPB with its underlying securities. The purpose of this exercise is to discover what the yield and discount to par value would be in the event I wanted to recreate IPB by buying the securities at any date in the future, what I call the new IPB. This will tell me whether old IPB, which is traded on the stock exchange, is a better value than buying the securities contained in that Trust Certificate individually. I currently own only 100 shares in a Roth IRA, recently purchased, and may at some point in the future add more. Before doing so, I will run this calculation:
This is my methodology. If anyone disagrees, please leave a comment or send me an email.
1. Compute the yield of each corporate bond in IPB based on the last purchase price shown at the FINRA site. For example, if the coupon is 7.5% on a 100 par value, and the price is 117, then the yield is determined by dividing $7.50 (annual interest on 100) by 117 (cost without commission) which equals 6.4% rounded.
2. You then put +17 premium beside the yield figure since the bond in that example is selling at a 17% premium to par value.
3. For the yield of the total package, ignore the treasury strips since they do not pay interest anyway. Add up all of the yield figures, and then divide the sum by 15.
4. For the discount to par value, add and subtract the premium and discount numbers to come up with a net number. Count the strips in this calculation. If the strips were selling at 38, then that number would be -62. The bond selling at 117 would be +17. All of the corporate bonds are equal weight, and I double weighted the strips which is almost 2 times the weight of an individual corporate bond in IPB. Anyone else can be more exact. So that would bring the strips to a -124 at a 38 price. Then, net all of those numbers and divide the total by 17 (15 corporate bonds and the double weight for the strips)
I have included a list of the links to the pricing data at FINRA for the corporate bonds. The FINRA site experiences technical difficulties frequently, and is having problems this evening. I would like to thank a reader for giving me the three symbols that I was missing in the calculation made earlier today:
General Electric Capital FINRA - Investor Information - Market Data - Bonds - Bond Detail
Johnson and Johnson FINRA - Investor Information - Market Data - Bonds - Bond Detail
May (now Macy's) FINRA - Investor Information - Market Data - Bonds - Bond Detail
Viacom (now CBS) FINRA - Investor Information - Market Data - Bonds - Bond Detail
Treasury Strips (2030)U.S. Treasury Strips - Markets Data Center - WSJ.com
Then, I compare the two numbers, yield and discount, to IPB's current discount to par value and yield. At the close today, the yield at $17.25 was 8.77% IPB Stock Quote - Indexplus Tr SER 03-1 TR Stock Quote - IPB Quote - IPB Stock Price The discount to the $25 par value was 31%.
One advantage in favor of IPB, which I do not calculate, is that it can be purchased with a single commission, whereas its components would cause the buyer to incur 16 separate commissions, along with problems in the bid/ask spread and other issues prevalent in the bond market.
Recent posts on this subject include:
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