Mortgage REIT Chimera Investment (CIM) has priced their new baby bonds with a coupon of 9.25%.
Nothing out of the ordinary on this issue—quarterly interest, maturity in about 5 years with an optional call period starting about 2 years after issuance date.
The pricing term sheet is here.
CIMO showing up in brokers this morning but no trades showing yet. Tried to place a limit order just guessing the price but “We can’t place your order there is no last price.”
Wouldn’t you look at the present value of all future interest payments to compare a 9 with 9.25 coupon in addition to the fact it’s trading flat since the last ex ?
Yes, but here is the question I have — when I put CIMN into a yield to maturity calculator, do I adjust for the amount of days it has traded flat since the last ex date even though that interest technically has not yet started accruing?
No. Right now you are between the ex date (7/31`) and the payment date, 8/15. You are not entitled to the payment on 8/15 so technically you should take into account the few days between now and 8/15 and ADD that to purchase price, but the difference would be inconsequential for calculation purposes. The next dividend that you will be entitled to will not begin to accumulate until 8/15
Thanks, I appreciate your help and I have learned so much from you.
However, I am still confused how to account for the fact that if I purchase a new issue which settles on an interest payment date, I only have to hold that issue for 75 days to receive 90 days of interest.
But if you sell on the ex-div date, a rational buyer won’t pay you $25 if they are aiming to earn the coupon.
Not sure I’m following you completely, but if you are buying a new issue, what you have to do is review the prospectus which will tell you when interest begins to accrue……. It’s always in the prospectus quite frequently in the first few pages…… The first dividend/interest payment could be longer or shorter than the normal 90 days and usually begins to accrue on the settlement date of the new issue. I’m not sure of what you’re describing – do you have a specific example? 75 days to receive 90 days of interest? If you’re talking about baby bonds or $25 perferreds they trade flat……. So you will collect the full 90 days of interest/dividend even if you buy it 16 days before the payment date if the x-div date is 15 days before…. HOWEVER, you pay for it to a degree in the price you pay at the time of purchase… Don’t forget – in theory, the share price drops by the amount of the dividend on x-div date, so you get the whole payment but you’ve more frequently than not paid up vs the price you’ll see on x-div date… Is that what you’re trying to figure?
I often have access to the initial public offerings of baby bonds and preferred stocks. Some are an easy “yes” — like BOH 8% preferred. And some are an easy “no” — like the Valley National 8.25% preferred. I know a lot of the decision making is an art rather than a science, but I’m trying to educate myself with respect to how to compare the new issue pricing with existing securities from the same issuer. There are a lot of interest calculations involved in making those comparisons which I do not fully grasp.
af – which broker do you use that often gives you access to most of these offerings?
I’m getting old. I’ve been doing secondary offerings and IPOs for over 40 years with about a half dozen brokers at a time. A good place to start with baby bond and preferred offerings is to find a Stifel broker with access to all of the deals underwritten by KBW.
https://en.wikipedia.org/wiki/Keefe,_Bruyette_%26_Woods
Thanks af, I assume you started your life as a saver and investor with growth stocks and funds and now later in life you want a larger portion of your money in bonds and preferred for the income.
Always interesting to others experiences with investing. Would like to hear your experiences if you want to take the time and the effort over in the sandbox.
CIMN pays 9% currently priced at 24.86 with no accumulated dividend. If that is priced accurately then the new 9.25% should trade around 25.10. If not above par I’d expect the other one to drop a few cents.
I see it a little differently. CIMN went ex on 8/1 and will go ex again on 11/1. In order to compare the two, I recognize that CIMN has 12 days of “dirty” interest — or about 7 cents or 8 cents. That puts them at parity.
Pay date is 8/15 that’s when dividend starts accumulating..
Not that i expect parity, calculating it is how I determine if the new issue starts out underpriced as they often do..