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URL:  https://boards.fool.com/help-with-understanding-bonds-29180464.aspx

Subject:  Help with understanding bonds Date:  3/18/2011  1:47 PM
Author:  happyclouds Number:  32486 of 36670

Hi,

I've recently begun helping my mother sort out her inherited IRA. About 30% of the IRA is in this one particular bond. She is 55. I'm fine keeping her in bonds, etc. but I just have no clue about what this means:

GOVT NATL MTG ASSN SER 2005-026 CL XY 5.50000% 03/20/2035REMIC PASS THRU CTFSGTD

Can some explain this, if it is easy, or point me towards and article that explains how bonds work. I understand the most basic gist, but after that I'm clueless about evaluating hers to see if it should stay in there or not. For what it is worth, she considers herself open to aggressive growth with her stocks for the next 5-10 years before scaling back to a more conservative approach.

Thanks so much.



I received this answer on another board, but I'm still a bit confused. How can I calculate how much is in there? I can see the quantity and a price, but is that the price if I took it out today or if I took it out in 2035? My mom will be 79 by then. Let's say she decides she would prefer to have that money in a dividend yielding stock like Coke (KO), how can I compare the bond to a stock?

Thanks again for any responses!


Here is the other response from another board:

The best place to ask is the Bond & Fixed Income discussion board--

http://boards.fool.com/why-bond-investing-can-matter-2917510......

The bond you describe is a GNMA bond, backed by the US government. For a govt bond, the 5.5% interest rate is excellent. You should receive checks for the interest twice per year until 2035, when the full face value will be refunded.

If you decide to sell the bond, any broker should be able to take care of that for you, but usually it will cost you several years of interest in discount. You may be offered less than face value for the bond.

The treasury bond yield curve here--

http://www.treasury.gov/resource-center/data-chart-center/in......

tells you that yesterday a US treasury bond with a 24 yr maturity date should pay 4.2-4.5%. Yours is paying 5.5%. So your bond should be worth about 122% of its face value. A broker will probably offer you around 110%. Hence, you probably need something with much better return to make the change payout in say 3 yrs or less.

I would keep the bond unless you have good reason to change. It is very safe and return for a bond is quite good. But this is a conservative, not an aggressive investment. You might want to consider the overall risk of the portfolio. Perhaps her other investments are more agressive.
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