What is the Effective Annual Interest Rate of Your Bonds?

tax returnsInsurance companies were met with a new mandate on their OCI filings this year: the requirement to list the “effective annual interest rate” on fixed income investments that were purchased at a price other than their face value.

In a nutshell, a bond’s effective interest rate takes into account the interest payments that will be received on the bond (stated coupon rate times the bond’s face value) and adjusts for the difference between the face amount of the bond and what was paid to acquire it. For example, if you paid $102 to acquire a $100 bond, you will lose $2 on that bond at maturity because you will only receive $100. Effective interest rate considers this loss of value in addition to the stream of interest payments received to determine the actual earnings the company will receive.

This concept is defined by the investment term “yield to maturity.”  Yield to maturity is THE primary consideration when comparing bonds meeting acceptable quality and maturity parameters. The higher the yield to maturity at the time of purchase, the better deal received when buying the bond.

Because this is a new requirement, many companies and their auditors are scrambling to figure out what information was needed and how to obtain it. Fortunately for Financial Fiduciaries clients, we are able to provide the needed information as part of our services to them. Our investment reporting system stores the yield to maturity on all bonds purchased for clients at the time they were purchased.  Our clients and their auditors faced with this requirement this year simply had to ask us to prepare a report of yield to maturity at cost and presto! – all the information they needed for this new line on their report was available (It was even available in Excel format if desired by the auditor).

Our goal at Financial Fiduciaries is to take care of our clients’ investment affairs so they can spend their time on other areas of business that require their attention. This is just another example of how having us on the job makes all aspects of handling a company’s investments easier and more efficient for its manager, staff and auditors!

About Objectively Speaking

Tom Batterman, founder of Vigil Trust & Financial Advocacy and Financial Fiduciaries, LLC is in the business of representing the best financial interests of his clients. Having provided objective, fee-only financial management services for over two decades, he specializes in managing the investment and related financial affairs of individuals and mutual insurance companies who do not have the time, interest or expertise to manage such matters on their own. As an objective, unbiased professional who takes on a fiduciary responsibility to his clients, he guides clients to the financial decisions they would make themselves if they had years of training and experience and the time and expertise to fully research and understand all of their options. Founded in 2010 as an outgrowth of Vigil Trust & Financial Advocacy, Financial Fiduciaries, LLC is a financial management solution for individuals and mutual insurance companies who recognize they do not have the time, interest or expertise to properly attend to their financial matters on their own. While there are many financial “advisors”, most of them have investment products to sell and the “advice” they provide is geared toward getting their clients to engage in a purchase. As one of the rare subset of advisors known as “fiduciary advisors”, Financial Fiduciaries does not sell any investment product so its guidance is not compromised by conflicts of interest which plague ordinary advisors. Prior to his employment in the financial industry in financial advocacy and trust positions, he worked at a private law practice in the Wausau area in the areas of estate planning, tax, retirement planning, corporate organizations and real estate. He is a graduate of the University of Wisconsin-Madison and the UW-Madison Law School and has during his career held Series 7, 24 and 65 securities licenses. A longtime resident of the Wausau, Wisconsin Area, Tom is active in the community. He enjoys golf, curling, skiing, fishing, traveling and spending time with his family.
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