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Non-Tech : Income Investing -- Ignore unavailable to you. Want to Upgrade?

To: codger who wrote (10809)	7/3/2014 1:04:54 PM
From: i.mkat	Read Replies (1) \| Respond to of 52048

Re: re GST-B I sold GST-B but kept the others that are over par since none is as much over as GST-B was. With the proceeds I bought LGCYO and added to SB-C and NMHDF. I find myself with a little more income AND some cash left over to pay the tax on the qualified dividends since almost everything I hold is in a taxable account. Was it a good trade altogether? .K

To: codger who wrote (10809)	7/4/2014 6:59:11 AM
From: Lord Xot	6 Recommendations Recommended By camroc325 KEN2CWL lilylady MRothaus1 RoomWitaView and 1 more member Respond to of 52048

Re: re GST-B When considering these sort of swaps, gains or losses aren't relevant beyond taxes. Taxes affect the amount available for reinvestment after sale and could be positive or negative depending on gain or loss. Once reinvestable cash is estimated, that number then becomes an input into the equations and it's then a matter of just doing the numbers. Beyond tax considerations on gains or losses, present value of the security is relevant, not past value, same as current yield is relevant, not yield at cost. When doing this in an IRA, gains or losses don't affect calculations as there are no taxes. In the bad/good ol' days when we had losses on all pfds, i wanted to swap one of my son's pfds to buy O-E at a better yield and price. He objected saying that would cause him a loss and he wanted to try to make his money back. I told him all money is green, and it didn't matter whether he recovered a loss in the other issue or recorded a gain in the new one, the math was the same. He understood this once i laid the numbers out for him. It's just a matter of knowing how to gather the numbers................................................................Xot

To: codger who wrote (10809)

7/4/2014 5:31:29 PM

From: mopgcw

Respond to of 52048

Re: re GST-B

the difference in the basis only changes the relative yields and the absolute nominal cashflows. it does not change the nominal differential between the scenarios.

Here is the math one should consider:

I bought gst in Oct @ par; sell in July for $28.50; reinvest in another security at 7.5% to the call date.

	IRR	NCF	Nov-13	Dec-13	Jan-14	Feb-14	Mar-14	Apr-14	May-14	Jun-14	Jul-14	Aug-14	Oct-18	Nov-18
Own to Call	11.29%	13,661	224	224	224	224	224	224	224	224	224	224	224	25,224


Sell Today	31.67%	5,516	224	224	224	224	224	224	224	224	28,724	-	-	-

Sell/Reinvst	11.88%	15,209	224	224	224	224	224	224	224	224	-	191	191	28,691

Returns		Net Cash	Gross Cash
YTM	11.29%	$13,661	$38,661
Exit Return	31.67%	$5,516	$30,516
Total Return	11.88%	$15,209	$40,209

Marginal improvement in returns on an IRR basis, $1,500 improvement in NCF before transaction costs and taxes (if any).

if set up the spreadhsheet correctly, you can then tweak the reinvestment rates, call dates/exit dates to understand the impact of the call, if it does not get called, and what rate/time you need to earn to be indifferent. you can also model different reinvestment scenarios at the call date to see the impacts.

in order for the swap to make sense, taking into account taxes and transaction costs, you have to believe:

1. GST will get called prior to the breakeven date

2. the current reinvestment is as safe/safer than the current investment in GST

3. you will be unable to invest at the current reinvestment rate or better that is assumed at the call date for the same or better risk profile, i.e. GST will get called and in Nov 18 one wont be able to buy something equivalent or safer and earn 7.5% (hence one's view of future rates and credit spreads is crucial).

if you change the basis to $26.25:

	IRR	NCF	Nov-13	Dec-13	Jan-14	Feb-14	Mar-14	Apr-14	May-14	Jun-14	Jul-14	Aug-14	Oct-18	Nov-18
Own to Call	9.92%	12,411	224	224	224	224	224	224	224	224	224	224	224	25,224


Sell Today	23.08%	4,266	224	224	224	224	224	224	224	224	28,724	-	-	-

Sell/Reinvest	10.56%	13,959	224	224	224	224	224	224	224	224	-	191	191	28,691

YTM	9.92%	$12,411	$38,661
Exit Return	23.08%	$4,266	$30,516
Total Return	10.56%	$13,959	$40,209