what is an ibonds duration?

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JamesSFO
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Re: what is an ibonds duration?

Post by JamesSFO »

Angst wrote:To address the OP: I'm in the "No Duration" camp. I think duration is meaningless wrt a non-negotiable security. That's not to say that rate changes won't have an impact on how I value an I or EE savings bond that I own, but there's no neat formula for predicting it.

My question though: If purchase limits for savings bonds did not exist, what would professional financial advisors be telling their clients wrt their complete FI portfolios and the %'s of I or EE bonds they might recommend their clients hold, and how would they explain this wrt to duration? Maybe advisors get to dodge the duration issue (and thread!) b/c they won't be bothered with savings bonds and those little $10k annual purchase limits.
Fascinating thought, and I think this sort of proves the "no duration" issue because if you could always return the bonds for face value then duration would show basically 0 sensitivity to interest rate changes... Anyhow, the limits are in place precisely because savings bonds are a bit too good of a deal due to this exact scenario.
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Re: what is an ibonds duration?

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I'm surprised at the "Duration is meaningless for a non-marketable security" line.

If there is a market for a security the price tells us the value of the security. (Efficient Market Hypothesis)
The lack of a market means we have to evaluate it for ourselves. So net-present value and duration are more useful for securities with a inefficient market, it's how you can tell if the treasuries offer is a joke or on opportunity.
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Re: what is an ibonds duration?

Post by Mel Lindauer »

Epsilon Delta wrote:I'm surprised at the "Duration is meaningless for a non-marketable security" line.

If there is a market for a security the price tells us the value of the security. (Efficient Market Hypothesis)
The lack of a market means we have to evaluate it for ourselves. So net-present value and duration are more useful for securities with a inefficient market, it's how you can tell if the treasuries offer is a joke or on opportunity.
We really don't have to value it for ourselves; we can simply use the Treasury's Savings Bond Wizard to provide the present value at any given point in time.
Best Regards - Mel | | Semper Fi
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Re: what is an ibonds duration?

Post by Epsilon Delta »

Mel Lindauer wrote:
Epsilon Delta wrote:I'm surprised at the "Duration is meaningless for a non-marketable security" line.

If there is a market for a security the price tells us the value of the security. (Efficient Market Hypothesis)
The lack of a market means we have to evaluate it for ourselves. So net-present value and duration are more useful for securities with a inefficient market, it's how you can tell if the treasuries offer is a joke or on opportunity.
We really don't have to value it for ourselves; we can simply use the Treasury's Savings Bond Wizard to provide the present value at any given point in time.
No, can use the Savings Bond Wizard to find out what the treasury will pay you for the bonds. That is not the value of the bonds. Do you really think a 19 year old EE bond with a redemption value of $1038 is only worth $1038, or is the fact that it will be worth $2000 next year relevant?
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Re: what is an ibonds duration?

Post by Mel Lindauer »

Epsilon Delta wrote:
Mel Lindauer wrote:
Epsilon Delta wrote:I'm surprised at the "Duration is meaningless for a non-marketable security" line.

If there is a market for a security the price tells us the value of the security. (Efficient Market Hypothesis)
The lack of a market means we have to evaluate it for ourselves. So net-present value and duration are more useful for securities with a inefficient market, it's how you can tell if the treasuries offer is a joke or on opportunity.
We really don't have to value it for ourselves; we can simply use the Treasury's Savings Bond Wizard to provide the present value at any given point in time.
No, can use the Savings Bond Wizard to find out what the treasury will pay you for the bonds. That is not the value of the bonds. Do you really think a 19 year old EE bond with a redemption value of $1038 is only worth $1038, or is the fact that it will be worth $2000 next year relevant?
Not any more relevant than holding a car for 25 years or so with the knowledge that it will be worth more as a collectible. However, I've never heard of a car having (or needing) a duration. Just because something will have more value at some time in the future doesn't mean we have to assign a duration to it. FWIW, this entire thing seems rather silly to me, since I fail to see what good can come from assigning an artificial duration figure to an I Bond now when none has existed since Savings Bonds were first issued and investors have done just fine without one.
Best Regards - Mel | | Semper Fi
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market timer
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Re: what is an ibonds duration?

Post by market timer »

Mel Lindauer wrote:FWIW, this entire thing seems rather silly to me, since I fail to see what good can come from assigning an artificial duration figure to an I Bond now when none has existed since Savings Bonds were first issued and investors have done just fine without one.
Just to give an example of how it's useful: I buy the max of EE bonds and I bonds every year in order to get "portable alpha." These savings bonds offer a free lunch relative to Treasuries, as I think everyone agrees. Problem is, my asset allocation does not call for these particular investments. So, I sell back the optionality and duration to the market, pocket the "portable alpha," and buy my desired asset allocation. I don't expect most savings bonds investors to go through this process, but if it weren't for the $10K limit, I'm certain that people like Bill Gross would be all over this trade. It just so happens that I'm poor enough that an extra few thousand dollars of profit a year makes a difference to my personal account, and I enjoy the puzzle of unlocking value.

Of course, the mirror image of the savings bond duration question--but for liabilities--is, what is the duration of a student loan or mortgage? It also happens to be the case that I have sub-2% fixed rate student loans on 20+ year repayment terms, and calculate duration for these for asset-liability matching purposes.
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Re: what is an ibonds duration?

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market timer wrote:So, I sell back the optionality and duration to the market, pocket the "portable alpha," and buy my desired asset allocation. I don't expect most savings bonds investors to go through this process. It just so happens that I'm poor enough that an extra few thousand dollars of profit a year makes a difference to my personal account, and I enjoy the puzzle of unlocking value.
Can you want to explain to the average layperson exactly how you accomplish the following with Savings Bond.
1. Sell back the optionality and duration to the market?
2. Pocket the "portable alpha"?

We're looking for clearly defined actual actionable steps any Savings Bond investor can take, not theory. We're all ears.
Best Regards - Mel | | Semper Fi
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Re: what is an ibonds duration?

Post by market timer »

Mel Lindauer wrote:Can you want to explain to the average layperson exactly how you accomplish the following with Savings Bond.
1. Sell back the optionality and duration to the market?
2. Pocket the "portable alpha"?

We're looking for clearly defined actual actionable steps any Savings Bond investor can take, not theory. We're all ears.
Here is a straightforward example. Suppose you have $100K and your asset allocation calls for buying $100K of equities. You could get portable alpha by borrowing $10K against your $100K of equities at near the risk-free rate (say, Fed Funds + 0.4%, which is possible in the options market) and buying $10K of I bonds. Maintain this position until Fed Funds + 0.4% exceeds the rate on I bonds, then redeem the I bonds and pay off the debt. In the meantime, you earn a spread of inflation rate - (Fed Funds + 0.4%).

Another arbitrage is buying EE bonds and shorting 20-year Treasuries, which currently yield less than 3.53%. Redeem the EE bonds if the yield on the short 20-year rises above the yield-to-maturity on the EE bonds.

Once these ideas are understood, the strategies can be refined and improved with options in the bond market. Neither strategy above is optimal, just easy to explain and profitable.
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Re: what is an ibonds duration?

Post by swaption »

I'll try to make this as simple as possible with an example. To make things more clear, let's say we have a $100,000 government issued bond with a 10% coupon. Let's say this bond has aged one year so that the current accrual is $110,000, with 29 years now to maturity. This bond is non-marketable and cannot be redeemed prior to maturity, so the only option is buy and hold. How would you value this bond? I think the math is fairly straight forward bond math involving a present value and the answer would be something well beyond the current accrual of $110,000. For examples sake let's call it $200,000. Any disagreement with all outlined thus far?

Now let's take the above and add something of additional value. In this case, let's now make it redeemable at the current accrual of $110,000. But let's make it clear this option is something in addition to what is outlined above. Would it make any sense for the addition of this option to result in a decline in value? Hopefully, the answer is obvious. But that is exactly what Mel is saying in the case of I Bonds, that the redemption option fixes the value at $110,000. The value of the above with the added option cannot be below $200,000.
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Re: what is an ibonds duration?

Post by Mel Lindauer »

swaption wrote:I'll try to make this as simple as possible with an example. To make things more clear, let's say we have a $100,000 government issued bond with a 10% coupon. Let's say this bond has aged one year so that the current accrual is $110,000, with 29 years now to maturity. This bond is non-marketable and cannot be redeemed prior to maturity, so the only option is buy and hold. How would you value this bond? I think the math is fairly straight forward bond math involving a present value and the answer would be something well beyond the current accrual of $110,000. For examples sake let's call it $200,000. Any disagreement with all outlined thus far?

Now let's take the above and add something of additional value. In this case, let's now make it redeemable at the current accrual of $110,000. But let's make it clear this option is something in addition to what is outlined above. Would it make any sense for the addition of this option to result in a decline in value? Hopefully, the answer is obvious. But that is exactly what Mel is saying in the case of I Bonds, that the redemption option fixes the value at $110,000. The value of the above with the added option cannot be below $200,000.
Of course there's disagreement since the real value of the savings bond is not your hypothetical value that you can't get for the bond from anyone, but what you can actually get from a willing buyer (the Treasury, in this case). Your figure is simply a made-up number that has no meaning since you can't realize that made-up cotton-candy number.
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Re: what is an ibonds duration?

Post by Epsilon Delta »

Mel Lindauer wrote:
swaption wrote:I'll try to make this as simple as possible with an example. To make things more clear, let's say we have a $100,000 government issued bond with a 10% coupon. Let's say this bond has aged one year so that the current accrual is $110,000, with 29 years now to maturity. This bond is non-marketable and cannot be redeemed prior to maturity, so the only option is buy and hold. How would you value this bond? I think the math is fairly straight forward bond math involving a present value and the answer would be something well beyond the current accrual of $110,000. For examples sake let's call it $200,000. Any disagreement with all outlined thus far?

Now let's take the above and add something of additional value. In this case, let's now make it redeemable at the current accrual of $110,000. But let's make it clear this option is something in addition to what is outlined above. Would it make any sense for the addition of this option to result in a decline in value? Hopefully, the answer is obvious. But that is exactly what Mel is saying in the case of I Bonds, that the redemption option fixes the value at $110,000. The value of the above with the added option cannot be below $200,000.
Of course there's disagreement since the real value of the savings bond is not your hypothetical value that you can't get for the bond from anyone, but what you can actually get from a willing buyer (the Treasury, in this case). Your figure is simply a made-up number that has no meaning since you can't realize that made-up cotton-candy number.
You can get the calculate value for the bond, all you have to do is wait and the Treasury will pay it in due course. But as a special extra feature their willing to pay a lot less right now.
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Re: what is an ibonds duration?

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market timer wrote:
Mel Lindauer wrote:Can you want to explain to the average layperson exactly how you accomplish the following with Savings Bond.
1. Sell back the optionality and duration to the market?
2. Pocket the "portable alpha"?

We're looking for clearly defined actual actionable steps any Savings Bond investor can take, not theory. We're all ears.
Here is a straightforward example. Suppose you have $100K and your asset allocation calls for buying $100K of equities. You could get portable alpha by borrowing $10K against your $100K of equities at near the risk-free rate (say, Fed Funds + 0.4%, which is possible in the options market) and buying $10K of I bonds. Maintain this position until Fed Funds + 0.4% exceeds the rate on I bonds, then redeem the I bonds and pay off the debt. In the meantime, you earn a spread of inflation rate - (Fed Funds + 0.4%).

Another arbitrage is buying EE bonds and shorting 20-year Treasuries, which currently yield less than 3.53%. Redeem the EE bonds if the yield on the short 20-year rises above the yield-to-maturity on the EE bonds.

Once these ideas are understood, the strategies can be refined and improved with options in the bond market. Neither strategy above is optimal, just easy to explain and profitable.
Neither of these transactions is arbitrage; arbitrage doesn't include words like "if", "when", and "until".

Unless you can execute all of the transactions simultaneously and earn a profit with no risk, it isn't arbitrage.
Simplify the complicated side; don't complify the simplicated side.
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Re: what is an ibonds duration?

Post by Mel Lindauer »

Epsilon Delta wrote:
Mel Lindauer wrote:
swaption wrote:I'll try to make this as simple as possible with an example. To make things more clear, let's say we have a $100,000 government issued bond with a 10% coupon. Let's say this bond has aged one year so that the current accrual is $110,000, with 29 years now to maturity. This bond is non-marketable and cannot be redeemed prior to maturity, so the only option is buy and hold. How would you value this bond? I think the math is fairly straight forward bond math involving a present value and the answer would be something well beyond the current accrual of $110,000. For examples sake let's call it $200,000. Any disagreement with all outlined thus far?

Now let's take the above and add something of additional value. In this case, let's now make it redeemable at the current accrual of $110,000. But let's make it clear this option is something in addition to what is outlined above. Would it make any sense for the addition of this option to result in a decline in value? Hopefully, the answer is obvious. But that is exactly what Mel is saying in the case of I Bonds, that the redemption option fixes the value at $110,000. The value of the above with the added option cannot be below $200,000.
Of course there's disagreement since the real value of the savings bond is not your hypothetical value that you can't get for the bond from anyone, but what you can actually get from a willing buyer (the Treasury, in this case). Your figure is simply a made-up number that has no meaning since you can't realize that made-up cotton-candy number.
You can get the calculate value for the bond, all you have to do is wait and the Treasury will pay it in due course. But as a special extra feature their willing to pay a lot less right now.
Of course they'll pay you less now than the'll pay you in the future, since the value you'll get at any specific time is based on how long you've held the bond, much like a short-term CD will earn less than a longer-term CD. This stuff isn't rocket science despite all the efforts to make it into something it isn't.

I, and I'm sure many other Savings Bond owners, am dying to know how we can cash in on some of these high cotton candy numbers that you're tossing around. You assign values that differ dramatically from what Treasury says they're worth, so please tell us how we can realize your much higher values and we'll all be eternally grateful. Otherwise, i fail to see any value in all of these hypothetical mental exercises and claims that have no actionable value and that amount to much ado about nothing.
Best Regards - Mel | | Semper Fi
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Re: what is an ibonds duration?

Post by patrick »

Mel Lindauer wrote:Of course there's disagreement since the real value of the savings bond is not your hypothetical value that you can't get for the bond from anyone, but what you can actually get from a willing buyer (the Treasury, in this case). Your figure is simply a made-up number that has no meaning since you can't realize that made-up cotton-candy number.
Do you really believe that what the Treasury (the only buyer) will pay right now is the only meaningful measure of a savings bond's value?

What if you had a savings bond that was issued 11 months ago? The treasury won't pay anything for them until you've held them a year. Does that actually mean that the value is zero and the bond is absolutely and completely worthless?
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Re: what is an ibonds duration?

Post by swaption »

Mel Lindauer wrote:
Epsilon Delta wrote:
Mel Lindauer wrote:
swaption wrote:I'll try to make this as simple as possible with an example. To make things more clear, let's say we have a $100,000 government issued bond with a 10% coupon. Let's say this bond has aged one year so that the current accrual is $110,000, with 29 years now to maturity. This bond is non-marketable and cannot be redeemed prior to maturity, so the only option is buy and hold. How would you value this bond? I think the math is fairly straight forward bond math involving a present value and the answer would be something well beyond the current accrual of $110,000. For examples sake let's call it $200,000. Any disagreement with all outlined thus far?

Now let's take the above and add something of additional value. In this case, let's now make it redeemable at the current accrual of $110,000. But let's make it clear this option is something in addition to what is outlined above. Would it make any sense for the addition of this option to result in a decline in value? Hopefully, the answer is obvious. But that is exactly what Mel is saying in the case of I Bonds, that the redemption option fixes the value at $110,000. The value of the above with the added option cannot be below $200,000.
Of course there's disagreement since the real value of the savings bond is not your hypothetical value that you can't get for the bond from anyone, but what you can actually get from a willing buyer (the Treasury, in this case). Your figure is simply a made-up number that has no meaning since you can't realize that made-up cotton-candy number.
You can get the calculate value for the bond, all you have to do is wait and the Treasury will pay it in due course. But as a special extra feature their willing to pay a lot less right now.
Of course they'll pay you less now than the'll pay you in the future, since the value you'll get at any specific time is based on how long you've held the bond, much like a short-term CD will earn less than a longer-term CD. This stuff isn't rocket science despite all the efforts to make it into something it isn't.

I, and I'm sure many other Savings Bond owners, am dying to know how we can cash in on some of these high cotton candy numbers that you're tossing around. You assign values that differ dramatically from what Treasury says they're worth, so please tell us how we can realize your much higher values and we'll all be eternally grateful. Otherwise, i fail to see any value in all of these hypothetical mental exercises and claims that have no actionable value and that amount to much ado about nothing.
Alright Mel, I've tried to indulge you in this occasionally confusing dialogue. I took it as genuine when you made completely irrelevant references to diamonds and vintage cars. But now you have likened something as simple as present value to a cotton candy valuation and taken the tone above. While explaining why present value matters is sort of akin to being on a science board and explaining why the existence of oxygen matters, here it goes. Present value is a way of putting disparate assets and cash flows on some equal footing for comparison. It's a way of quantifying, for example, in the event of some unforeseen emergency, the impact from a value standpoint of cashing in high coupon I Bonds or say taking a loan out against your 401K by selling some bonds (and no this is not the time start preaching about the need for an emergency fund). Essentially, there is no in debating whether the fact that a high coupon I Bond is worth more than it's redemption value matters. It just does. By extension, there is no point in debating why changes in interest rates have an impact on that value matter. It just does.

To the business owner, accounting has no impact on cash flow and can't be monetized, but it certainly matters. It matters a lot. But at this point I'm not expecting this to get anywhere. It brings to mind the Upton Sinclair quote:

'It is difficult to get a man to understand something, when his salary depends on his not understanding it.'

Now I don't think in the literal sense that your salary depends on this, but your comments lead me to believe that perhaps you have some vested interest in keeping this all simple for the average lay men, or perhaps more simply just not being convinced of anything on this topic. I suppose it's easy to dismiss folks like market timer, epsiolon delta, and swaption as part of some fringe group of finance geeks needlessly overcomplicating things. I can confidently say that in this case you are not doing anybody any favors. It's all now in now in public view and the lay men can decide for themselves. There is absolutely nothing more I can say on the topic.
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Re: what is an ibonds duration?

Post by Mel Lindauer »

swaption wrote:
Now I don't think in the literal sense that your salary depends on this, but your comments lead me to believe that perhaps you have some vested interest in keeping this all simple for the average lay men, or perhaps more simply just not being convinced of anything on this topic. I suppose it's easy to dismiss folks like market timer, epsiolon delta, and swaption as part of some fringe group of finance geeks needlessly overcomplicating things. I can confidently say that in this case you are not doing anybody any favors. It's all now in now in public view and the lay men can decide for themselves. There is absolutely nothing more I can say on the topic.
BINGO! We finally have some points of agreement. The parts of your quote in red are precisely my entire reason for having this exchange. I do, indeed, want to keep things simple for the average lay investor. I've tried to point out that It doesn't take a rocket scientist (or a finance geek) using some complicated forumula to decide that if an investor needed to redeem one of their I Bonds, they should probably keep the 3.6% fixed rate I Bond as opposed to the 0% fixed rate one. Or that if they've held one of their EE Bonds for 19 years and 11 months, they'd probably want to hold it for another month to get the doubling. When it comes to things like this, I prefer the KISS method and common sense.

And, it should be perfectly obvious to you and to everyone here that I receive no financial benefit of any kind when I discuss Savings Bonds. Rather, I simply spend my time trying to help investors understand that investing isn't rocket science, as the Wall Street Machine would have them believe.

Like you, I've had my say and we'll let the readers decide what works best for them.
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Re: what is an ibonds duration?

Post by Epsilon Delta »

I don't do the math because it's hard, I do the math because I'm lazy and its the best way to simplify.
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Re: what is an ibonds duration?

Post by market timer »

magician wrote:Neither of these transactions is arbitrage; arbitrage doesn't include words like "if", "when", and "until".

Unless you can execute all of the transactions simultaneously and earn a profit with no risk, it isn't arbitrage.
When you have optionality, you can use the occasional "if" and "until" in your trading. For example, in the I bond case, you're earning a positive spread with no principal risk until you redeem the bond or get tired of the trade. In the EE bond case, if yield on the short 20-year doesn't rise fast enough, you may need to hold the EE bond until maturity (20 years) to guarantee profit on the convergence trade. That's definitely a liquidity risk that shouldn't be taken lightly. Generally, all the interesting EE bond trades require a willingness to hold until maturity if rates stay low.
Last edited by market timer on Wed Mar 27, 2013 9:45 pm, edited 1 time in total.
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Re: what is an ibonds duration?

Post by JamesSFO »

Mel Lindauer wrote:BINGO! We finally have some points of agreement. The parts of your quote in red are precisely my entire reason for having this exchange. I do, indeed, want to keep things simple for the average lay investor. I've tried to point out that It doesn't take a rocket scientist (or a finance geek) using some complicated forumula to decide that if an investor needed to redeem one of their I Bonds, they should probably keep the 3.6% fixed rate I Bond as opposed to the 0% fixed rate one. Or that if they've held one of their EE Bonds for 19 years and 11 months, they'd probably want to hold it for another month to get the doubling. When it comes to things like this, I prefer the KISS method and common sense.

And, it should be perfectly obvious to you and to everyone here that I receive no financial benefit of any kind when I discuss Savings Bonds. Rather, I simply spend my time trying to help investors understand that investing isn't rocket science, as the Wall Street Machine would have them believe.

Like you, I've had my say and we'll let the readers decide what works best for them.
Mel thanks for your contributions here!

I continue to be of the camp that duration is not a particularly helpful concept for working with savings bonds. Thinking about the present value of the predicted income streams is useful but that is also true of real estate, stocks, etc.
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Re: what is an ibonds duration?

Post by magician »

market timer wrote:
magician wrote:Neither of these transactions is arbitrage; arbitrage doesn't include words like "if", "when", and "until".

Unless you can execute all of the transactions simultaneously and earn a profit with no risk, it isn't arbitrage.
When you have optionality, you can use the occasional "if" and "until" in your trading. For example, in the I bond case, you're earning a positive spread with no principal risk until you redeem the bond or get tired of the trade. In the EE bond case, if yield on the short 20-year doesn't rise fast enough, you may need to hold the EE bond until maturity (20 years) to guarantee profit on the convergence trade. That's definitely a liquidity risk that shouldn't be taken lightly. Generally, all the interesting EE bond trades require a willingness to hold until maturity if rates stay low.
I agree.

I was simply disagreeing with your use of the term "arbitrage".
Simplify the complicated side; don't complify the simplicated side.
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Re: what is an ibonds duration?

Post by Angst »

Mel Lindauer wrote:
Epsilon Delta wrote:I'm surprised at the "Duration is meaningless for a non-marketable security" line.

If there is a market for a security the price tells us the value of the security. (Efficient Market Hypothesis)
The lack of a market means we have to evaluate it for ourselves. So net-present value and duration are more useful for securities with a inefficient market, it's how you can tell if the treasuries offer is a joke or on opportunity.
We really don't have to value it for ourselves; we can simply use the Treasury's Savings Bond Wizard to provide the present value at any given point in time.
(My bolding above)
Neither of these ways of valuing Savings Bonds can automatically adjust value calculations for hypothetical changes in interest rates. From my understanding, that's the big thing that "duration" is useful for, at least as it's typically mentioned on this website. That's all I'm saying re: duration being "meaningless" for Savings Bonds.

Back to that hypothetical world where we can purchase unlimited amounts of I Bonds and EE Bonds:
I personaly find it useful to look at I and EE Bonds as two kinds of extremes of "term" (I'm avoiding the word "duration"). I bonds are very short-term, or like cash (1 yr/5 yr restrictions notwithstanding), and EE bonds are very long-term. So you kind of have a Bar-bell, if you will. I think Savings Bonds muddy up the nice simplicity of duration with respect to assessing the interest rate risk of one's FI portfolio. Perhaps professional advisors are happy not to have to bother with them. For me personally, I am happy to hold them and to forgo the usefulness of being able to explicitly assess the duration of my complete FI portfolio. Of course I value them in my own way and I tweak the conventional part of my FI to accomodate my Savings Bonds holdings. I'm just glad I don't have to explain it to any customer but myself! Still, I do wonder what professional advisors on this forum would be recommending their clients hold under this hypothetical situation. For someone of lesser means, it's not so hypothetical.
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Re: what is an ibonds duration?

Post by JamesSFO »

Angst wrote:
Mel Lindauer wrote:
Epsilon Delta wrote:I'm surprised at the "Duration is meaningless for a non-marketable security" line.

If there is a market for a security the price tells us the value of the security. (Efficient Market Hypothesis)
The lack of a market means we have to evaluate it for ourselves. So net-present value and duration are more useful for securities with a inefficient market, it's how you can tell if the treasuries offer is a joke or on opportunity.
We really don't have to value it for ourselves; we can simply use the Treasury's Savings Bond Wizard to provide the present value at any given point in time.
(My bolding above)
Neither of these ways of valuing Savings Bonds can automatically adjust value calculations for hypothetical changes in interest rates. From my understanding, that's the big thing that "duration" is useful for, at least as it's typically mentioned on this website. That's all I'm saying re: duration being "meaningless" for Savings Bonds.
I think you just missed the boat potentially. The key point is that unlike most bonds savings bonds do NOT actually change in value in response to interest rates. When interest rates rise (or fall) an I bond (or EE Bond) does not decrease (increase) in ACTUAL redemption value. That's what duration is all about, what will the change in interest rates do to the value of the bond.

That said, your view on whether to KEEP the bond may change as a result of the interest rate change, and the limited I/EE bond space may influence that choice.
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Re: what is an ibonds duration?

Post by Angst »

JamesSFO wrote:
Angst wrote:
Mel Lindauer wrote:
Epsilon Delta wrote:I'm surprised at the "Duration is meaningless for a non-marketable security" line.

If there is a market for a security the price tells us the value of the security. (Efficient Market Hypothesis)
The lack of a market means we have to evaluate it for ourselves. So net-present value and duration are more useful for securities with a inefficient market, it's how you can tell if the treasuries offer is a joke or on opportunity.
We really don't have to value it for ourselves; we can simply use the Treasury's Savings Bond Wizard to provide the present value at any given point in time.
(My bolding above)
Neither of these ways of valuing Savings Bonds can automatically adjust value calculations for hypothetical changes in interest rates. From my understanding, that's the big thing that "duration" is useful for, at least as it's typically mentioned on this website. That's all I'm saying re: duration being "meaningless" for Savings Bonds.
I think you just missed the boat potentially. The key point is that unlike most bonds savings bonds do NOT actually change in value in response to interest rates. When interest rates rise (or fall) an I bond (or EE Bond) does not decrease (increase) in ACTUAL redemption value. That's what duration is all about, what will the change in interest rates do to the value of the bond.

That said, your view on whether to KEEP the bond may change as a result of the interest rate change, and the limited I/EE bond space may influence that choice.
I'm confused here... Who's been left on which landing?! The bolded portion of your paragraph above just re-states the point I've been making all along. It's the reason I've been saying that duration is useless (and/or technically doesn't exist) for savings bonds. Duration tells us nothing about potential changes in "value" of savings bonds with respect to potential changes in rates. Whether "duration" even exists for savings bonds or whether it equals zero can be argued over, but to me it's moot for an unmarketable security.
http://www.bogleheads.org/forum/viewtop ... 4#p1651163
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Re: what is an ibonds duration?

Post by swaption »

Angst wrote:
JamesSFO wrote:
Angst wrote:
Mel Lindauer wrote:
Epsilon Delta wrote:I'm surprised at the "Duration is meaningless for a non-marketable security" line.

If there is a market for a security the price tells us the value of the security. (Efficient Market Hypothesis)
The lack of a market means we have to evaluate it for ourselves. So net-present value and duration are more useful for securities with a inefficient market, it's how you can tell if the treasuries offer is a joke or on opportunity.
We really don't have to value it for ourselves; we can simply use the Treasury's Savings Bond Wizard to provide the present value at any given point in time.
(My bolding above)
Neither of these ways of valuing Savings Bonds can automatically adjust value calculations for hypothetical changes in interest rates. From my understanding, that's the big thing that "duration" is useful for, at least as it's typically mentioned on this website. That's all I'm saying re: duration being "meaningless" for Savings Bonds.
I think you just missed the boat potentially. The key point is that unlike most bonds savings bonds do NOT actually change in value in response to interest rates. When interest rates rise (or fall) an I bond (or EE Bond) does not decrease (increase) in ACTUAL redemption value. That's what duration is all about, what will the change in interest rates do to the value of the bond.

That said, your view on whether to KEEP the bond may change as a result of the interest rate change, and the limited I/EE bond space may influence that choice.
I'm confused here... Who's been left on which landing?! The bolded portion of your paragraph above just re-states the point I've been making all along. It's the reason I've been saying that duration is useless (and/or technically doesn't exist) for savings bonds. Duration tells us nothing about potential changes in "value" of savings bonds with respect to potential changes in rates. Whether "duration" even exists for savings bonds or whether it equals zero can be argued over, but to me it's moot for an unmarketable security.
http://www.bogleheads.org/forum/viewtop ... 4#p1651163
I'll repeat what I said earlier even more simply, and I have yet to see even an attempt to contradict:

(1) The way to value a non-marketable bond with no redemption option is by using present value. In the case of a high coupon bond, this would be at a premium.

(2) It is not possible for (1) with the addition of a redemption option to have a lower value than the present value used in (1). The addition of an option can only make it worth more.

But all that say that the redemption value is the value are contradicting the above. Can't say this unless you can find a flaw in the above.
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Re: what is an ibonds duration?

Post by Mel Lindauer »

Definition of 'Duration'
A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.

Since I Bond values do not rise and fall when interest rates rise or fall, I Bonds do not have a duration other than 0. All of the other arguments seem to ignore this very basic fact.
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Re: what is an ibonds duration?

Post by Angst »

swaption wrote:I'll repeat what I said earlier even more simply, and I have yet to see even an attempt to contradict:

(1) The way to value a non-marketable bond with no redemption option is by using present value. In the case of a high coupon bond, this would be at a premium.

(2) It is not possible for (1) with the addition of a redemption option to have a lower value than the present value used in (1). The addition of an option can only make it worth more.

But all that say that the redemption value is the value are contradicting the above. Can't say this unless you can find a flaw in the above.
... :shock:
Mel Lindauer wrote:Definition of 'Duration'
A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.

Since I Bond values do not rise and fall when interest rates rise or fall, I Bonds do not have a duration other than 0. All of the other arguments seem to ignore this very basic fact.
Thanks Mel,
I couldn't agree more, :happy
and I still find it pretty meaningless with respect to I Bonds and EE Bonds, although "useless" might be a better choice of words.
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Re: what is an ibonds duration?

Post by swaption »

To say that value is the redemption price is to imply a flaw in what I have written above. Once again, I see no attempt. Don't disagree with your definition of duration, just your definition of value. Have not addressed that.
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Re: what is an ibonds duration?

Post by Angst »

swaption wrote:To say that value is the redemption price is to imply a flaw in what I have written above. Once again, I see no attempt. Don't disagree with your definition of duration, just your definition of value. Have not addressed that.
I think we're pretty much just dancing on the head of a pin here (or whatever the appropriate aphorism is) and probably don't really disagree a lot. I don't want to belabor things much further, but I can't resist presenting an example:

Consider two different FI portfolios. Both of them are bar-bells, with LT Bonds on one end and "zero" duration Savings Bonds on the other end. However, the difference between the two is that one uses only I Bonds and the other uses only EE Bonds. Both portfolios net out to identical (mid-term) durations and have equal amounts of LT Bonds and Savings Bonds. All of this is hypothetical, including an assumption that one can purchase an unlimited quantity of savings bonds.

Now let's say I want to anticipate nominal rates jumping dramatically in the next year due to sudden, significant increases in inflation.

So here's the question: What does duration tell me to anticipate with respect to one portfolio vs. the other?

The answer is nothing. They have identical durations.

The problem however is that an investor should look at these two different portfolios very differently with respect to this scenario. The I Bonds would be extremely safe in this context. But the EE Bonds? Does one still want to hold them for the next 20 years? But we don't even know if they have 20 years to go before doubling in value or just 2 years. Duration in this example tells us nothing about this. And it tells us nothing about the impact of the fixed rate components for either the I or EE Bonds. Using duration to consider rate change scenarios in this example perhaps might not be totally "useless", but it's misleading in that it suggests the portfolios are equals when they are anything but that.

Professional advisors routinely emphasize managing the duration of one's FI portfolio. But what about this scenario? As I suggested earlier, this is not so hypothetical for those of us of lesser means. Personally, I simply recognize some of the limitations of duration, and I recognize the complications introduced with Savings Bonds. I find it an interesting problem.
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Re: what is an ibonds duration?

Post by Epsilon Delta »

Angst wrote:
swaption wrote:To say that value is the redemption price is to imply a flaw in what I have written above. Once again, I see no attempt. Don't disagree with your definition of duration, just your definition of value. Have not addressed that.
I think we're pretty much just dancing on the head of a pin here (or whatever the appropriate aphorism is) and probably don't really disagree a lot. I don't want to belabor things much further, but I can't resist presenting an example:

Consider two different FI portfolios. Both of them are bar-bells, with LT Bonds on one end and "zero" duration Savings Bonds on the other end. However, the difference between the two is that one uses only I Bonds and the other uses only EE Bonds. Both portfolios net out to identical (mid-term) durations and have equal amounts of LT Bonds and Savings Bonds. All of this is hypothetical, including an assumption that one can purchase an unlimited quantity of savings bonds.

Now let's say I want to anticipate nominal rates jumping dramatically in the next year due to sudden, significant increases in inflation.

So here's the question: What does duration tell me to anticipate with respect to one portfolio vs. the other?

The answer is nothing. They have identical durations.

The problem however is that an investor should look at these two different portfolios very differently with respect to this scenario. The I Bonds would be extremely safe in this context. But the EE Bonds? Does one still want to hold them for the next 20 years? But we don't even know if they have 20 years to go before doubling in value or just 2 years. Duration in this example tells us nothing about this.
That should be a hint that the durations are not zero and are not the same.
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Re: what is an ibonds duration?

Post by Angst »

Epsilon Delta wrote:That should be a hint that the durations are not zero and are not the same.
Here are three Savings Bonds that I currently own:

Jan, 2008 EE Bond with 3.00% rate
Jan, 2012 EE Bond with 0.60% rate
Oct, 2007 I Bond with 1.30% rate

Can you tell me the durations I should be using for each of them how they're calculated? Thank you!
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Re: what is an ibonds duration?

Post by market timer »

Angst wrote:
Epsilon Delta wrote:That should be a hint that the durations are not zero and are not the same.
Here are three Savings Bonds that I currently own:

Jan, 2008 EE Bond with 3.00% rate
Jan, 2012 EE Bond with 0.60% rate
Oct, 2007 I Bond with 1.30% rate

Can you tell me the durations I should be using for each of them how they're calculated? Thank you!
To calculate a duration, we'd need to calculate value. To do this, one must specify a redemption strategy, then calculate the present value of expected cash flows using that redemption strategy.

For the 1.3% I bond, I suggest a redemption strategy along the following lines: If 5-year TIPS yield - 0.5% > 1.3%, then redeem, else hold. The extra 0.5% is my conservative estimate for the value of the put option--it's likely a bit higher today, but lower in the distant future. 5-year TIPS currently yield -1.47%, so they'd need to rise by 3.27% before I'd consider redeeming this I bond. In other words, the present value of this I bond is worth far more than redemption value. Based on the real yield curve, the market is not pricing in rates to move this much for at least the next 15 years. I'd ballpark the duration for this I bond around 20-22 years, only a few years before the date it stops accruing interest.

The Jan 2008 EE bond has a YTM of 3.7% for its remaining 15 years. I suggest a redemption strategy for this bond along these lines in the near term: If 3-month T-bill yield - 1% > 3% and 15-year Treasury yield - 0.5% > 3.7%, then redeem, else hold. Since this bond has a fairly high fixed rate (3%), it is currently attractive relative to both short term Treasuries as well as long term Treasuries (due to guaranteed doubling). I'd ballpark the duration around 12-14 years.

By similar reasoning, I'd ballpark the Jan 2012 EE bond duration in the range of 10-12 years. The fixed rate is lower, meaning short term Treasuries would not need to rise as far to become relatively more attractive. Long term Treasuries would need to rise about 1% to become more attractive than holding the EE bond until maturity.

This does not take into account the tax advantages of holding EE bonds, nor the drawback of illiquidity, both of which could change the numbers. These are rough estimates, done without any precise calculations, to give an indication of duration.
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Re: what is an ibonds duration?

Post by LH »

market timer wrote:
Angst wrote:
Epsilon Delta wrote:That should be a hint that the durations are not zero and are not the same.
Here are three Savings Bonds that I currently own:

Jan, 2008 EE Bond with 3.00% rate
Jan, 2012 EE Bond with 0.60% rate
Oct, 2007 I Bond with 1.30% rate

Can you tell me the durations I should be using for each of them how they're calculated? Thank you!
To calculate a duration, we'd need to calculate value. To do this, one must specify a redemption strategy, then calculate the present value of expected cash flows using that redemption strategy.

For the 1.3% I bond, I suggest a redemption strategy along the following lines: If 5-year TIPS yield - 0.5% > 1.3%, then redeem, else hold. The extra 0.5% is my conservative estimate for the value of the put option--it's likely a bit higher today, but lower in the distant future. 5-year TIPS currently yield -1.47%, so they'd need to rise by 3.27% before I'd consider redeeming this I bond. In other words, the present value of this I bond is worth far more than redemption value. Based on the real yield curve, the market is not pricing in rates to move this much for at least the next 15 years. I'd ballpark the duration for this I bond around 20-22 years, only a few years before the date it stops accruing interest.

The Jan 2008 EE bond has a YTM of 3.7% for its remaining 15 years. I suggest a redemption strategy for this bond along these lines in the near term: If 3-month T-bill yield - 1% > 3% and 15-year Treasury yield - 0.5% > 3.7%, then redeem, else hold. Since this bond has a fairly high fixed rate (3%), it is currently attractive relative to both short term Treasuries as well as long term Treasuries (due to guaranteed doubling). I'd ballpark the duration around 12-14 years.

By similar reasoning, I'd ballpark the Jan 2012 EE bond duration in the range of 10-12 years. The fixed rate is lower, meaning short term Treasuries would not need to rise as far to become relatively more attractive. Long term Treasuries would need to rise about 1% to become more attractive than holding the EE bond until maturity.

This does not take into account the tax advantages of holding EE bonds, nor the drawback of illiquidity, both of which could change the numbers. These are rough estimates, done without any precise calculations, to give an indication of duration.
If 5-year TIPS yield - 0.5% > 1.3%, then redeem, else hold.
thanks for the post. Could you rephrase the above, I cannot follow it. is that a negative sign - 0.5? Regardless, neither 0.5 or -0.5 is greater than 1.3.

I am confused as to negative or dash, as well as to what you mean by the > sign, do I add it in? if so, do I add in a negative, or a postive? interested, but also lost.

thanks,

LH
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Re: what is an ibonds duration?

Post by market timer »

LH wrote:
If 5-year TIPS yield - 0.5% > 1.3%, then redeem, else hold.
thanks for the post. Could you rephrase the above, I cannot follow it. is that a negative sign - 0.5? Regardless, neither 0.5 or -0.5 is greater than 1.3.

I am confused as to negative or dash, as well as to what you mean by the > sign, do I add it in? if so, do I add in a negative, or a postive? interested, but also lost.
For as long as you hold the I bond, the redemption option allows you to pick one of the following: 5-year TIPS yield or 1.3% (I bond fixed rate). When you redeem the I bond, you give up this choice in the future. How much is that worth? I gave a value of 0.5%. In other words, you might want to redeem the I bond and buy 5-year TIPS when 5-year TIPS pay 0.5%/year more than the 1.3% I bond fixed rate, i.e., when 5-year TIPS yield greater than 1.8%. The "-" sign above is this subtraction.
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Re: what is an ibonds duration?

Post by Mel Lindauer »

market timer wrote:
LH wrote:
If 5-year TIPS yield - 0.5% > 1.3%, then redeem, else hold.
thanks for the post. Could you rephrase the above, I cannot follow it. is that a negative sign - 0.5? Regardless, neither 0.5 or -0.5 is greater than 1.3.

I am confused as to negative or dash, as well as to what you mean by the > sign, do I add it in? if so, do I add in a negative, or a postive? interested, but also lost.
For as long as you hold the I bond, the redemption option allows you to pick one of the following: 5-year TIPS yield or 1.3% (I bond fixed rate). When you redeem the I bond, you give up this choice in the future. How much is that worth? I gave a value of 0.5%. In other words, you might want to redeem the I bond and buy 5-year TIPS when 5-year TIPS pay 0.5%/year more than the 1.3% I bond fixed rate, i.e., when 5-year TIPS yield greater than 1.8%. The "-" sign above is this subtraction.
This totally ignores the following:
1. The 5-year is only guarantee for five years whereas the I Bond fixed rate is guaranteed for 30 years.
2. The I Bond is tax deferred so if you redeem it and buy the 5-year with the proceeds, you'd lose the tax-deferral and have to pay taxes annually on the 5-year, thus reducing your returns.
3. The I Bond can be used tax-free for qualifying educational expenses; the 5-year can't.
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Re: what is an ibonds duration?

Post by swaption »

Putting aside the analysis by Market Timer above, which seems plausible, my very unscientific assessment is that the duration of high coupon I Bonds can simply be considered really long. Makes me think a Warren Buffett quote regarding the expensing of stock options. With respect to those that argued that the valuations would be subject to a very inexact science, he said the following:

It is better to be approximately right than precisely wrong

In this case really long is approximately right. You can guess what I think is precisely wrong.
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Re: what is an ibonds duration?

Post by market timer »

Mel Lindauer wrote:This totally ignores the following:
1. The 5-year is only guarantee for five years whereas the I Bond fixed rate is guaranteed for 30 years.
2. The I Bond is tax deferred so if you redeem it and buy the 5-year with the proceeds, you'd lose the tax-deferral and have to pay taxes annually on the 5-year, thus reducing your returns.
3. The I Bond can be used tax-free for qualifying educational expenses; the 5-year can't.
The analysis above intentionally ignored the tax advantages of I bonds, since they are highly dependent on an individual's circumstances. For highly taxed people who will retire early and use the bonds for college tuition (I'm hoping to be in that camp), these features are highly valuable. So, points 2 and 3 would further increase the attractiveness of the I bond, and increase its duration. Note that I already estimated a long duration of 20-22 years for the 1.3% fixed I bond.

Point 1 is actually addressed in the analysis, by subtracting 0.5% from the yield on the 5-year TIPS (as I noted a conservative estimate of the option value). You're correct to note that the I bond offers a known fixed rate for a longer term than the 5-year TIPS. However, at some point, TIPS offer a high enough yield to give up the optionality of the I bond. How high must those yields be? Assuming an upward sloping real yield curve, if 5-year TIPS offer 0.5% more than the I bond fixed rate, someone who doesn't benefit much from the I bond tax advantages might want to redeem at that time to buy TIPS (either 5-year, 10-year, or some other term). The analysis does not depend much on whether the true value of the option is 0.5%, 1%, or 2%--the key point is that the duration for these bonds is very long in pretty much any reasonable analysis.
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Re: what is an ibonds duration?

Post by LTCM »

What an interesting thread. I would side with the duration exists for i-bonds because their value does change with movements in interest rates. There is a limit to that movement on one side due to the put option.

I flunked out of math before university but I remember equations with multiple solutions. Is this possibly one of those cases? How do limits work in this case?

With interest rates below the coupon value of an I-bond there is a longer duration and with interest rates above the coupon value any longer duration is destroyed/removed by the put option to become zero.

The floating coupon rate further makes the bonds longer duration during low inflation and shorter during high inflation. Relatively speaking. If the coupon rate is a smaller percentage of the returns it becomes less relevant.

I came to this thread because I do believe in attempting to match my bond duration to my investment horizon and I'm trying to evaluate to what extent I-bonds affect the duration of my bond holding.

My guess is they help lengthen duration when that is advantageous and shorten duration when that is advantageous and are a free lunch in that respect. Interest rate risk seems not to exist. There is no reinvestment risk. There is no price risk.
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Re: what is an ibonds duration?

Post by Jaylat »

magician wrote: Sat Mar 23, 2013 9:38 pm
Call_Me_Op wrote:Duration is not applicable to an I-Bond. Its value has no interest rate sensitivity.
Thus, its (effective) duration is zero. It's applicable, it's just zero.
Consider the case where the owner of the I Bond enters into a contract with a third party to transfer all I Bond cash flows to the third party for a negotiated price. The amount that third party would be willing to pay for that contract would most definitely vary depending on the prevailing interest rate environment, which sets the discount rate for the cash flows.

I bonds must be held for a minimum 12 months so that implies a duration of one year at minimum for a new I Bond.

There are a few other I Bond provisions that could arguably further affect its duration in order to maximize returns to holders:
  • Coupons on I Bonds are "Sticky" in that the rate set is fixed for 6 months. So investors seeking to realize current high yields need to stay in at least that long;
  • If you cash an I bond before it is five years old, you will lose the last three months of interest. Again, an incentive for investors to hold for the 5 year minimum.
Edit: Those of us with I Bonds in Gift Boxes that are not deliverable until future years are also locked into a minimum "duration." In my case, I have 6 years of gifts, with varying durations of 1-6 years.
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Re: what is an ibonds duration?

Post by Oregano »

Jaylat wrote: Thu May 12, 2022 2:25 pm
magician wrote: Sat Mar 23, 2013 9:38 pm
Call_Me_Op wrote:Duration is not applicable to an I-Bond. Its value has no interest rate sensitivity.
Thus, its (effective) duration is zero. It's applicable, it's just zero.
Consider the case where the owner of the I Bond enters into a contract with a third party to transfer all I Bond cash flows to the third party for a negotiated price. The amount that third party would be willing to pay for that contract would most definitely vary depending on the prevailing interest rate environment, which sets the discount rate for the cash flows.

I bonds must be held for a minimum 12 months so that implies a duration of one year at minimum for a new I Bond.

There are a few other I Bond provisions that could arguably further affect its duration in order to maximize returns to holders:
  • Coupons on I Bonds are "Sticky" in that the rate set is fixed for 6 months. So investors seeking to realize current high yields need to stay in at least that long;
  • If you cash an I bond before it is five years old, you will lose the last three months of interest. Again, an incentive for investors to hold for the 5 year minimum.
Edit: Those of us with I Bonds in Gift Boxes that are not deliverable until future years are also locked into a minimum "duration." In my case, I have 6 years of gifts, with varying durations of 1-6 years.
This is confusing a hypothetical discounted cash flow valuation with the actual redemption value of an I-bond. Your example is basically, "If I-bonds were actually TIPS, the value would fluctuate!" But I-bonds are not TIPS.
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Re: what is an ibonds duration?

Post by vineviz »

LTCM wrote: Thu May 12, 2022 11:53 am What an interesting thread. I would side with the duration exists for i-bonds because their value does change with movements in interest rates.
Duration is a parameter that applies to pure bonds. Despite the name, "savings bonds" are not pure bonds.

In many ways, a savings bond is more like a bank deposit account (e.g. a savings account or. CD) than a pure bond so any discussion of "duration" is bound to be confusing and contradictory. This isn't helped by the fact that even with a pure bond, the word "duration" can refer to more than one property of the bonds.

One meaning of "duration" is the weighted average time the bond's cash flows. A savings bond has no cash flows, per se, with the exception of the final maturity in 30 years. Does it have a duration of 30 years?

Another meaning of "duration" is the sensitivity of the bond's price to a given change in yields. Savings bonds don't have yields, and their price is fixed like the cash in your savings account. Does the savings bond have a duration of zero, like cash?

Technically, neither answer is correct. Operationally, either answer could be an appropriate assumption.
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Re: what is an ibonds duration?

Post by LTCM »

vineviz wrote: Fri May 13, 2022 1:50 pm One meaning of "duration" is the weighted average time the bond's cash flows. A savings bond has no cash flows, per se, with the exception of the final maturity in 30 years. Does it have a duration of 30 years?
Thanks. I did some quick googling and found these. I'm sure you know all this already. I'm just trying to talk through it to better my understanding.



So in the case of i-bonds they have a duration at purchase of between 5-30 years selectable at the owners preference? (and something slightly different in the first 5 years?) After 5 years the duration drops to 0-25 years. If rates rise you don't get hurt because of the short duration and if rates fall you take the benefit of long duration?
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Re: what is an ibonds duration?

Post by LTCM »

It seems what actually needed for bonds/securities with options is effective duration https://corporatefinanceinstitute.com/r ... -duration/

Effective Duration = [(PV–) – (PV+) / (2 * (∆Curve) * (PV0)]

PV– = PV of cash flows when the yield goes down parallelly
PV+ = PV of cash flows when the yield goes up parallelly
PV0 = Current Price of the Bond
∆Curve = Amount of parallel shift in the yield curve

The calculations are beyond me but it seems like it should be doable. Although there is no secondary market for i-bonds and therefor no price change it seems one could easily be inferred. There is a price at which another investor would buy the benefits of an i-bond via contract with the owner (perhaps because they're maxed out or don't have a SSN). Can you get the price change from TIPS?

There's a excel template here: https://www.educba.com/effective-duration/
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Re: what is an ibonds duration?

Post by vineviz »

LTCM wrote: Fri May 13, 2022 4:12 pm So in the case of i-bonds they have a duration at purchase of between 5-30 years selectable at the owners preference? (and something slightly different in the first 5 years?) After 5 years the duration drops to 0-25 years. If rates rise you don't get hurt because of the short duration and if rates fall you take the benefit of long duration?
In the end you land at a conclusion that savings bonds have whatever duration you want to assume they have, at which point I'd argue it's probably best to stop trying to shove the square peg into a round hole.
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Re: what is an ibonds duration?

Post by LTCM »

vineviz wrote: Fri May 13, 2022 4:41 pm
LTCM wrote: Fri May 13, 2022 4:12 pm So in the case of i-bonds they have a duration at purchase of between 5-30 years selectable at the owners preference? (and something slightly different in the first 5 years?) After 5 years the duration drops to 0-25 years. If rates rise you don't get hurt because of the short duration and if rates fall you take the benefit of long duration?
In the end you land at a conclusion that savings bonds have whatever duration you want to assume they have, at which point I'd argue it's probably best to stop trying to shove the square peg into a round hole.
I'm just trying to determine whether they shorten or lengthen the average of my bond holdings. (Both?!)
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Re: what is an ibonds duration?

Post by vineviz »

LTCM wrote: Fri May 13, 2022 4:43 pm
vineviz wrote: Fri May 13, 2022 4:41 pm
LTCM wrote: Fri May 13, 2022 4:12 pm So in the case of i-bonds they have a duration at purchase of between 5-30 years selectable at the owners preference? (and something slightly different in the first 5 years?) After 5 years the duration drops to 0-25 years. If rates rise you don't get hurt because of the short duration and if rates fall you take the benefit of long duration?
In the end you land at a conclusion that savings bonds have whatever duration you want to assume they have, at which point I'd argue it's probably best to stop trying to shove the square peg into a round hole.
I'm just trying to determine whether they shorten or lengthen the average of my bond holdings. (Both?!)
If you intend to hold them roughly to maturity, I'd just plug in 20 years as an assumed duration and call it "good".
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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Re: what is an ibonds duration?

Post by Oregano »

LTCM wrote: Fri May 13, 2022 4:43 pm
vineviz wrote: Fri May 13, 2022 4:41 pm
LTCM wrote: Fri May 13, 2022 4:12 pm So in the case of i-bonds they have a duration at purchase of between 5-30 years selectable at the owners preference? (and something slightly different in the first 5 years?) After 5 years the duration drops to 0-25 years. If rates rise you don't get hurt because of the short duration and if rates fall you take the benefit of long duration?
In the end you land at a conclusion that savings bonds have whatever duration you want to assume they have, at which point I'd argue it's probably best to stop trying to shove the square peg into a round hole.
I'm just trying to determine whether they shorten or lengthen the average of my bond holdings. (Both?!)
To what end? You know, without a doubt, that a change in interest rates will not change the redemption value of an I-bond. They might change whether or not you WANT to redeem the I-bond (e.g., you own a 0% real rate I-bond and now a 1% I-bond is available), but it can never change how much you can redeem it for. The duration is 0.
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Re: what is an ibonds duration?

Post by rob »

Mel Lindauer wrote: Sat Mar 23, 2013 3:57 pm You simply can't lose money when you invest in I Bonds as you can with traditional bonds.
While technically true; I think we have to be careful that after taxes and any difference from your personal inflation rate against the official one (forbidden topic)... Some will lose....
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Re: what is an ibonds duration?

Post by LTCM »

Oregano wrote: Fri May 13, 2022 5:03 pm it can never change how much you can redeem it for.
Well it can. A savvy investor maxed out on I-bonds would offer me a lot more than $10,000 for the economic rights to my 2021 I-bonds. To me that means the value is higher than $10,000. The economic benefit to me if I don't sell is more than $10,000 in present value. There's a $10,000 floor on the value, but not a ceiling. That's the point. That affects duration. It's definitely not duration=0.

A duration of 0 means the holder is indifferent to interest rates rising or falling (I think). So I'm (reasonably) confident that's not the case here.
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Re: what is an ibonds duration?

Post by Mel Lindauer »

rob wrote: Fri May 13, 2022 5:25 pm
Mel Lindauer wrote: Sat Mar 23, 2013 3:57 pm You simply can't lose money when you invest in I Bonds as you can with traditional bonds.
While technically true; I think we have to be careful that after taxes and any difference from your personal inflation rate against the official one (forbidden topic)... Some will lose....
You need to differentiate between NOMINAL and REAL. As I stated, you can't lose money (NOMINAL) when you invest in I Bonds. However, as you point out, you can lose future spending power when considering taxes and personal inflation rates (REAL).
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Re: what is an ibonds duration?

Post by vineviz »

LTCM wrote: Fri May 13, 2022 6:06 pm A duration of 0 means the holder is indifferent to interest rates rising or falling (I think). So I'm (reasonably) confident that's not the case here.
That's not what a duration of 0 means in any technical sense of the word.

If you have $1,000 worth of savings bonds today, and tomorrow you wake up to find that yields have dropped by 3%, what is the price at which you can sell your savings bonds? $1,000. Duration = 0.

If you have $1,000 worth of 20-year zero coupon Treasury bond with a yield of 3% today and you wake up tomorrow to find that yields have dropped by 3%, what is the price at which you can sell your bond? $1,806. Duration = 20.
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