Independent Banker - June 2023 - 25

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that's nowhere near par. Let's review
the benefits of buying bonds at both
discounts and premiums.
Discount versus premium
I've made the case that investors like
the sound of a bond that's priced
below 100 cents on the dollar. It has
the ring of a bargain, or (even better)
a superior position to the unfortunate
investor who paid par when first
issued. This, of course, requires buyers
to ignore the fact their own portfolio
has recently dropped in value.
Whether you realize it or not, bonds
priced below par tend to perform best
when rates fall, particularly when
there's some kind of a call option
attached, which applies to about 80%
of bonds owned by community banks.
The opposite occurs when a
bond is priced over 100 cents on
the dollar. Premium bonds, which
requires buyers to accept that the
original owners paid less for the
same bonds, will do better if rates
rise. The above-market coupon rates
will help to keep the duration from
extending and possibly even cause
yields to move higher since premium
Since a given bond is worth par on possibly only
two days of its life, those being pricing date and
maturity date, most everything a community bank
buys will be at prices either above or below par.
investments are sometimes referred
to as " quasi-floaters. "
Valuable tool
The good news is there is a standard
measuring stick to augment some of
the numerical features mentioned
above: Total Rate of Return (TRR).
Total return takes into account three
variables: yield, change in price and
horizon date. It's a much more complete
standard than yield, and the primary
risk in a bond-price volatility-is
embedded in the calculation. (You can
calculate TRR on virtually any financial
instrument, including equities, as well
as commodities.)
Education on Tap
Virtual bond school scheduled for June
ICBA's Securities' endorsed broker Stifel will host a virtual portfolio
management series June 13-15. Topics include bond basics,
investment product detail, and portfolio building. Up to 4 hours of
CPE are offered. To register, visit icbasecurities.com
Product selection analytics
The Stifel Strategies and Analytics Group produces the popular
Investment Alternatives Matrix that calculates Total Return on a
wide range of bonds that may be suitable for community banks.
To receive your complimentary copy, contact your Stifel sales rep.
For example, if you are offered
a security at a price of 93 cents on
the dollar, priced to yield 5.25% to
maturity, and a year from now its
market value has risen to 95 cents,
your total return for that period will
be 7.25%. The typical set of offering
documents that brokers provide
will include a price volatility table,
which usually includes projections
assuming immediate and parallel
rate shocks. Feel free to ask for a
Total Return Analysis (TRA) screen
from your brokers. TRAs are easy
to read and can provide valuable
data for your decision making.
Finally, most full-service
firms, including ICBA Securities'
endorsed broker Stifel, produce
TRR matrices that are frequently
updated and readily available, for
some pre-purchase analysis. So
make life easier on yourself, and
help improve the performance of
your bond portfolio: Adopt total
return analysis as part of your due
diligence as you consider premium
versus par versus discount
purchase opportunities.
Jim Reber, CPA, CFA (jreber@
icbasecurities.com), is president
and CEO of ICBA Securities, ICBA's
institutional, fixed-income brokerdealer
for community banks
independentbanker.org // 25
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Independent Banker - June 2023

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