Another bond question

[Anonymous]

The other bond post has prompted me to toss a question out for the financial mavens who frequent this board:

I happen to have a $5,000 New York taxable "Build America Bond" issued in 2010 in an IRA, coupon rate 5.646% (feds were subsidizing state/local bonds, so interest rates were favorable). It matures in 2027. Face value is $5000.

Of course, I wish I'd invested much more than $5000 in this -- it was kind of on a lark purchase -- I happened to read at the time that BABs might be good investments, then jumped on this one when it was issued. Turns out BABs really were good investments! My $5k bond now has a $6200 value, and has accumulated about $700 of interest.

This has really been a learning experience for me. Given the small amount, I'm not so much concerned about the money as learning the right approach so I know for the future.

Since the price has gone up significantly, should I consider selling the bond and putting the money into an equity fund? Or should I just keep it until 2027, and reap the interest? Any financial types that can tell me the correct answer? I'd really like to know b/c I don't feel I understand bonds very well -- I have only this actual bond holding; all other bond holdings are in bond index funds.

[Anonymous]

Here's the thing. Generally higher risk investments carry the potential for higher returns, while safer investments have lower returns.

It seems unlikely New York will default on its bonds, so you have a pretty safe investment that is paying over 5%, at a time when other safe investments may be paying 1% or less.

You could decide that you are confident you don't need this money in the short term, and that over the long term investing in the stock market will net you better returns (than 5.6%). In that case, I think it would make sense to sell the bond and invest the proceeds.

Or, you might decide that you want part of your portfolio in more safe and stable investments, and if you can get 5.6% on those assets right now you are ahead of the game.

You need to think about how to divide up your investments among different classes of assets. Very young people might want to be 100% in stocks, but I think most people want to have at least some investments in bonds.

[Anonymous]

Thanks! Good points. We do have an asset allocation "strategy" and divvy up investments b/w stocks and bonds, with a cash emergency fund in an FDIC account. 99.99% of our bond holdings are in index funds though. This little bond is one of a very few physical bonds that we have, I think.

I guess I was trying to figure out, from an investment perspective, whether it's good to sell a physical bond when it looks like its value may take a hit if interest rates rise.

But since the bond is yielding over 5%, and I will get the face value back at the end of the term, it seems like I should just hang onto it and reap the returns. As you point out, it's a relatively safe asset w/ a very good return.

[Anonymous]

Anonymous wrote:Thanks! Good points. We do have an asset allocation "strategy" and divvy up investments b/w stocks and bonds, with a cash emergency fund in an FDIC account. 99.99% of our bond holdings are in index funds though. This little bond is one of a very few physical bonds that we have, I think.

I guess I was trying to figure out, from an investment perspective, whether it's good to sell a physical bond when it looks like its value may take a hit if interest rates rise.

But since the bond is yielding over 5%, and I will get the face value back at the end of the term, it seems like I should just hang onto it and reap the returns. As you point out, it's a relatively safe asset w/ a very good return.

Yes, its value only takes a hit if you plan to sell it before maturity-- that's the big difference between an individual bond and bond fund.