Understanding Bond Pricing

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Cassandra McKinney
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1 Understanding Bond Pricing

2 By better understanding bonds, you can more confidently use them to strengthen your portfolio. 2

3 Education on securities Develop an Ongoing Strategy with Fidelity Resources to help inform and assist you in managing your assets Insights for helping you make more prudent and informed decisions 3

4 1 2 3 Common Questions How many of you currently have bonds in your portfolio? Ever wonder why it s harder to get a bond quote than a stock quote? How many of you have a grasp on what you re being charged per bond trade? 4

5 Comprehending the Bond Market Understanding Trading Costs Assessing Pricing for Individual Bonds Today s Agenda 5

7 The Makeup of the Bond Market Varies from the Stock Market STOCK MARKET BOND MARKET Makeup Size Trading marketplace Pricing transparency Equity shares of publicly owned companies Limited to size of shares offered by companies Centralized (Ex. NYSE or NASDAQ) Generally transparent and liquid Debt securities issued by corporations, governments, government agencies, municipalities Relatively small and large debt instruments Fragmented, bonds are traded over the counter. Larger issuance = more transparent/liquid Smaller issuance = opaque pricing/less liquid 7

8 Size CHARACTERISTICS BOND STOCK Market Size 1 $39 Trillion $30 Trillion Daily Trading Volumes 2 $763 Billion $292 Billion Number of Securities 3 1,100,000 5,540 Ford (example) Outstanding 4 $75 Billion $49 Billion Ford (example) Number of Issues Bonds SIFMA, Q3 2017, Equity NYSE, S&P 500, Dow, NASDAQ. 2. Bonds SIFMA, Q4 2017, Equity AMEX/ARCA, NYSE, NASDAQ, BATS, DirectEdge. 3. Bonds-FINRA Jan 2018, Equity-World Federation of Exchanges Dec Bloomberg Recent 10-K filing. In general, the bond market is volatile, bond prices rise when interest rates fall and vice versa. This effect is usually pronounced for long-term securities. Any fixed income security sold or redeemed prior to maturity may be subject to a substantial gain or loss. 8

9 Volume: US Bond Markets DAILY TRADING VOLUME ($BN) AND CUSIPS OUTSTANDING $1,000 $800 $600 $400 $200 $0 1.0M $505 $213 1K 43K $31 94K $11 $4 14K Treasuries MBS Corporate Municipal Agency 1.2M 1.0M 800K 600K 400K 200K 0K Daily Trading Volume ($BN) # of Cusips Source: FINRA, SIFMA, Dec

12 Valuation Pricing: Monthly Statement Bond Pricing Valuation For illustrative purposes only Source: Fidelity.com Screen-print taken on 12/22/

13 Valuation Pricing: Nightly Valuation For illustrative purposes only Source: Fidelity.com Screen-print taken on 12/22/

14 Valuation Pricing: Bond Details For illustrative purposes only Source: Fidelity.com Screen-print taken on 12/22/

15 Valuation Pricing: Fixed Income Analytics For illustrative purposes only Source: Fidelity.com 15

16 Historical Pricing: Trading Liquidity For illustrative purposes only Source: Fidelity.com Screen-print taken on 12/22/

17 Live Pricing: Fidelity Bond Aggregation ~50K Unique Bonds Offered ~75K Total Offerings 17

18 Live Pricing: Live Listing of Bonds Available For illustrative purposes only Source: Fidelity.com 18

19 Live Pricing: Treasuries and Corporate Live Bid and Offer Prices Bid Price: Ask Price: Yield Spread: 0.005% Bid Price: Ask Price: Yield Spread: 0.011% For illustrative purposes only Source: Fidelity.com 19

20 Live Pricing: Municipal Bond Offerings For illustrative purposes only Source: Fidelity.com 20

21 Live Pricing: Depth of Book 6 dealers bidding Different quantities and prices 11 dealers offering Different quantities and prices For illustrative purposes only Source: Fidelity.com 21

Live Depth of Book and Historical Recent Trades for Corporate Bonds Best Offer: 112.388 Best Bid: 111.902 Yield Spread: 0.

22 Live Depth of Book and Historical Recent Trades for Corporate Bonds Best Offer: Best Bid: Yield Spread: Recent Trades Investor Bought earlier at Investor Sold earlier at For illustrative purposes only Source: Fidelity.com 22

Live Depth of Book and Historical Recent Trades for Corporate Bonds Best Offer: 124.

23 Live Depth of Book and Historical Recent Trades for Corporate Bonds Best Offer: No Bids Trades often months apart Pricing increased over time, in line with general Muni market For illustrative purposes only Source: Fidelity.com 23

24 Live Pricing: The Yield Table Fidelity.com > Research > Fixed Income Bonds & CDs Quick and easy scan of 120 comparative yield data-points Derived every 15 minutes from live bond inventory Immediate, one-click, access to search results for that category For illustrative purposes only Source: Fidelity.com 24 24

25 Live Pricing: Using the Fidelity.Com Bond Yield Table View by Highest or Median yields Click on a yield to see offerings 25 For illustrative purposes only Source: Fidelity.com

26 Live Pricing: The Yield Curve For illustrative purposes only Source: Fidelity.com 26 26

28 Cost Transparency OFFERINGS SEEN BY TRADERS PRICES SEEN BY CUSTOMERS IN OFFERINGS PRICES SEEN BY CUSTOMERS IN TRADE TICKET A Disclosed Mark-up ($1/Bond) $1 Bond Fidelity Process: Transparent Pricing Inventory (and prices) from dealers Inventory (and prices) from dealers Inventory (and prices) from dealers Undisclosed Mark-up ($?/Bond) Undisclosed Mark-up ($?/Bond) $? Bond B Markup Broker Process: Undisclosed Pricing Inventory (and prices) from dealers Inventory (and prices) from dealers Inventory (and prices) from dealers 28

Mark-up Fee Comparisons For illustrative purposes only Source: Fidelity.com Price Quantity Yield Date/Time Buy/Sell 101.963 100 3.195 06/08/2015 04:49:44 Customer Buy 101.863 100 3.

29 Mark-up Fee Comparisons For illustrative purposes only Source: Fidelity.com Price Quantity Yield Date/Time Buy/Sell /08/ :49:44 Customer Buy /08/ :49:44 Dealer to Dealer /04/ :11:59 Customer Buy /04/ :11:53 Dealer to Dealer Fidelity s $1 per bond Mark-up ( ) Another broker s $19.46 per bond Mark-up ( ) 29

30 Confirms now display Mark-up/down For illustrative purposes only Source: Fidelity.com 30

31 Impact Compare Fidelity s $1 per bond mark-up with competitors who do not disclose their mark-up Fidelity.com/fixed-income-bonds/bond-pricing For illustrative purposes only Source: Fidelity.com, July 2018 See disclosure on page 40 for details on this study Source: Fidelity.com 31

32 Comprehending the Bond Market Understanding Trading Costs Assessing Pricing for Individual Bonds In Review 32

33 Next Steps Review the materials in your kit: Fidelity Viewpoints article, Is it time to look at CDs? Fixed Income Individual Securities summary Attend additional seminars: Bond Investing Beyond Yield A Deeper Dive Demystifying Bond Selection for Your Portfolio Using Fidelity s Fixed Income & Bond Investing Tools 33 Copyright FMR LLC. All Rights Reserved.

34 Where to start: Fidelity.com > Research > Fixed Income, Bonds & CDs fixedincome.fidelity.co m/ftgw/fi/filanding For illustrative purposes only Source: Fidelity.com 34 34

35 More on the Corporate Insight Bond Pricing Study Fidelity.com/fixed-incomebonds/bond-pricing For illustrative purposes only Source: Fidelity.com, July 2018 See disclosure on page 40 for details on this study 35 35

36 How Fidelity Can Help Meet with a Fidelity investment professional Further understand your current bond holdings Explore how you may improve your portfolio with bonds See if you re currently paying additional mark-ups on bond transactions 36

38 Why Fidelity WE BELIEVE IN MAKING THE COMPLEX, SIMPLER Planning and Advice Trading Straightforward Pricing Expert Insights and Investing Tools Security and Privacy

39 By better understanding bonds, you can more confidently use them to strengthen your portfolio. 39

40 Disclosures 1. (from pages 31 and 35) Fidelity commissioned Corporate Insight to study bond pricing, available online, for self-directed retail investors from five brokers that offer corporate and municipal bonds. The study compared online bond prices for over 40,000 municipal and corporate inventory matches between February 8th and February 14th, It compared municipal and corporate inventories offered online in varying quantities. The study found on average that four competitors that bundled their mark-ups or fees into their online bond prices were asking an average of $13.32 more per bond. Corporate Insight determined the average cost differential by calculating the difference between the costs of matching corporate and municipal bond inventory at Fidelity vs. firms in this study that do not disclose their mark-up before or at the time of trade, then averaging the differences across all of the competitor firms. For the table, the example competitor trade costs range of $160 $485 is based on an average size order of $22,000 face or par value bonds and the average mark-ups observed among the four selected competitors displayed in the table. For the 12 months ending February 2018, Fidelity s retail brokerage account holders who purchased individual municipal or corporate bonds purchased an average of 22 bonds per transaction. Minimum mark-up or mark-down of $19.95 applies if traded with a Fidelity representative. For U.S. Treasury purchases traded with a Fidelity representative, a flat charge of $19.95 per trade applies. A $250 maximum applies to all trades, reduced to a $50 maximum for bonds maturing in one year or less. Fixed income trading requires a Fidelity brokerage account with a minimum opening balance of $2,500. Rates are for U.S. dollar denominated bonds; additional fees and minimums apply for non-dollar bond trades. Other conditions may apply; see Fidelity.com/commissions for details. Please note that mark-ups and mark-downs may affect the total cost of the transaction and the total, or "effective," yield of your investment. The offering broker, which may be our affiliate, National Financial Services LLC, may separately mark-up or mark-down the price of the security and may realize a trading profit or loss on the transaction. References to individual securities are for illustrative purposes only, and should not be construed as investment advice. In general, the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities). Fixed income securities also carry inflation risk, liquidity risk, call risk and credit and default risks for both issuers and counterparties. Any fixed income security sold or redeemed prior to maturity may be subject to loss. 40

41 Disclosures Fidelity Go and Fidelity Strategic Disciplines are advisory services offered by Fidelity Personal and Workplace Advisors LLC (FPWA), a registered investment adviser. Fidelity Strategic Disciplines includes the Breckinridge Intermediate Municipal Strategy, the Fidelity Equity-Income Strategy, the Fidelity Tax-Managed U.S. Equity Index Strategy, the Fidelity Intermediate Municipal Strategy and the Fidelity Core Bond Strategy. Fidelity Wealth Services are advisory services offered by FPWA or Fidelity Personal Trust Company, FSB (FPTC), a federal savings bank. Non-deposit investment products and trust services offered by FPTC and its affiliates are not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency, are not obligations of any bank, and are subject to risk, including possible loss of principal. Brokerage services provided by Fidelity Brokerage Services LLC (FBS), and custodial and related services provided by National Financial Services LLC (NFS), each a member of NYSE and SIPC. FPWA, FPTC, FBS, and NFS are Fidelity Investments companies. These advisory services are provided for a fee. Interest income earned from tax-exempt municipal securities generally is exempt from federal income tax, and may also be exempt from state and local income taxes if the investor is a resident in the state of issuance. A portion of the income received may be subject to federal and state income taxes, including the federal alternative minimum tax. In addition, investors may be subject to tax on amounts recognized in connection with the sale of municipal bonds, including capital gains and market discount taxed at ordinary income rates. Market discount arises when a bond is purchased on the secondary market for a price that is less than its stated redemption price by more than a statutory amount. Before making any investment, investors should review the official statement for the relevant offering for additional tax and other considerations. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. Fidelity does not provide legal or tax advice. Fidelity cannot guarantee that such information is accurate, complete, or timely. Laws of a particular state or laws that may be applicable to a particular situation may have an impact on the applicability, accuracy, or completeness of such information. Always consult an attorney or tax professional regarding your specific legal or tax situation. Past performance is no guarantee of future results. Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI

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