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Financial Post / Rechtshaffen: Mo’ money, mo’ problems: Even the wealthy are worrying about their financial future

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There’s a list of problems that are only created with more money

They say the best time to plan for the future is when things are going well.

Of course, that’s in a perfect world. In today’s world, people are nervous and concerned about their finances, and so we are seeing an increased demand for financial planning. In some ways, this makes perfect sense. If someone’s financial future looks good when things are bad, they can be fairly confident they will be OK under most circumstances.

The increasing demand at our firm is from what most would consider wealthy Canadians, generally those with a net worth of $3 million to $30 million. Now, I can see some eye-rolling and groaning right about now. “What do these rich people have to worry about?” Well, there is an old saying (and a newer song): Mo’ Money, Mo’ Problems.

Some issues and concerns are similar across the wealth spectrum, while others are unique to those with a lot of money. Let’s take a look at one area that would affect the wealthy differently than most, but may be of particular concern at the moment: gifting to children or grandchildren.

Gifting to family is simply not on the agenda for many Canadians. Just like the instructions on the airplane tell you to put safety gear on yourself before helping a child, your financial plan should look after yourself first before seeing if you can help others. But if you are in the position to easily help others, then this is likely a consideration, especially when it comes to real estate.

To look at a fictional example, if you have three middle-aged children and nine grandchildren, ranging in age from five to 25, things can get worrying if gifting to them was part of your planning.

What sometimes happens is that the oldest child is looking to buy a home, and the parents may decide to contribute $200,000 to the down payment. However, the question isn’t how much they can afford to contribute to the oldest child; it is how much they can afford to equally contribute to all three children.

If they can’t afford to gift $600,000 ($200,000 to each child), then they can’t afford to gift $200,000 to the first child. Not all parents will contribute equally to their children, but many will plan to.

Often, the gift to the oldest child will take place several years before the gift to the youngest child. What happens if there is a lot of inflation over that time? Do you gift more than $200,000 to the youngest, given the $200,000 is now worth much less than it was maybe eight years earlier? What if you simply don’t feel you can afford to give that much money today to the youngest? Is there a way to give less?

It can be even harder when it comes to grandchildren. There are nine of them in our example, and a gift of $50,000 can easily be perceived as a $450,000 commitment. Given the 20-year age gap, how will that be managed effectively? What if the first four grandchildren receive this gift and the last five don’t?

Yes, these are first-world problems of the wealthy, but they are real issues. Families can split up over favouritism from parents, and these types of gifting issues can sometimes be the cause of it.

To help manage this process, we encourage families to work out a financial plan that will provide greater insight into their financial future on an annual basis. With this information, they can better plan out potential gifts and see what they truly can or can’t afford. They can also determine which types of accounts or holdings are best used to fund these gifts.

Maybe the result of this planning is to be a little more cautious at the beginning to help ensure an ability to fund gifts in good and bad times. As we say, you can always choose to gift more in the future, but it is tough to get a gift back if you gave too much.

My firm has put together a free report on the 10 key financial planning questions of high-net-worth Canadians, along with some thoughts on how to best answer those questions. Some people will look at these questions and directly relate to them. Others will be in a different place and say they wish they had those problems.

But there are some universal concerns regardless of wealth. These relate to making sure you and a partner will be OK, trying to make the most of what you have and how you can best help the larger family.

That core is the same, but there’s definitely a list of problems that are only created with more money, and there needs to be some good planning to deal with them, especially in this environment.

Reproduced from Financial Post, October 5, 2022 .

Ted Rechtshaffen
Provided By:
Ted Rechtshaffen, MBA, CFP
President and CEO
tedr@tridelta.ca
(416) 733-3292 x 221

Risk Management Series – Bonds, Part 2

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Why Do Bonds Trade at a Premium?

Bond pricing is a function of a number of moving parts: namely, coupon rate, market interest rates, credit quality, and term to maturity.  As a result, bonds often trade at a premium or discount to their maturity value (usually $100); this can cause confusion and frustration for investors.

We outline some of the key elements of bond pricing and its relationship to current market interest rates so that you can better understand how bonds are priced.  As mentioned in Part 1 “Risk Management Series – Bonds”  in between the date when a bond is issued until its maturity date, its market price (the price at which the bond trades in the market) will fluctuate.

When a bond is issued, its coupon rate (interest rate paid on the bond) is reflective of the current market interest rate environment for bonds of similar quality and that have a similar term to maturity.  E.g. if Royal Bank of Canada issues a 5 year bond maturing on September 30, 2018 and the market interest rate for similar bonds is 3.0%, then the coupon rate on the Royal Bank of Canada will be approximately 3.0%.

iStock_000000674097XSmallIf interest rates decline after a bond was issued, then any bond paying a higher coupon rate than the market interest rate should have a premium value.  For example if market interest rates for 5 year bonds decline from 4.0% to 3.0%, then a bond that pays a coupon rate of 4.0% is now worth more, because the investor is receiving 1.0% more in payments per year than the market rate.  Consequently, the bond with the 4.0% coupon should trade at a premium (trade at a higher price than it was issued at) to balance out the higher fixed interest payments.

In order to determine how much of a premium (or discount) each bond should trade at, fixed income (bond) portfolio managers compare bonds of similar quality with similar maturity dates using a calculation called Yield to Maturity (YTM).  This calculation determines the total return an investor can earn on a bond purchase based on: 1) the bond’s current market price, 2) its coupon rate, 3) maturity date and 4) maturity value (usually $100.00).

For example, let’s say Royal Bank issued a 10 year bond in September 2008 paying a 5% coupon rate with a maturity date of September 30, 2018 (Bond A).  Royal Bank also issues a 5 year bond on September 2013 that matures on September 30, 2018 with a coupon of 3.0% (Bond B).  So even though the bonds were issued on different dates, they currently have the same maturity date and as such are quite comparable.

Bond A should trade at a premium because from now until maturity, Bond A investors will receive 2% more each year in interest income than Bond B investors ($10 in total benefit over 5 years).  Based on the yield to maturity calculation, Bond A would have to trade at the premium price of $109.22 to offer a total return of 3% per year for the investor (the higher price offsets the higher interest payments).  Consequently, bond investors today may notice that many of the bonds in their portfolios were bought for prices well above their $100 face values, but that these bonds likely have higher coupon rates.  Bond A’s premium will decline each year (also known as price decay) as it approaches maturity, because it is one less year that you are collecting the higher coupon rate.      To get a fuller picture, investors need to look at both purchase price AND the coupon rate offered by each bond.

The objective of the portfolio manager is to provide the greatest total return to the investor, which includes both the loss (or gain) on the value of the bond PLUS the interest payments received.  If the portfolio manager feels they can earn a higher total return by buying a bond with a higher coupon rate, but it trades at a premium, they will do so.  In the example above, if he can buy Bond A for $108, they could earn 3.25% per year for their clients vs. just 3.0% by buying Bond B.  A large part of a fixed income portfolio manager’s job is to perform these types of comparisons to try to attain higher total returns for clients.

Accumulated Interest

Another reason that a bond may trade at a premium is to reflect accrued interest.  Most bonds only pay interest two times a year (semi-annual payments).  For example if the bond was issued in December, it will make coupon payments in June and December; if the bond was issued in March, it will make coupon payments in March and September.  But, if you buy the bond on the market in between those coupon payment dates, you essentially are getting additional payments.

For example, if a bond makes payments in June and December and you buy the bond in May, you will have held the bond for one month, but you will have received 6 months’ worth of interest.  Bond prices reflect this benefit, typically by adding the accumulated amount of interest owing to the purchase price of the bond.  For example, if a $100 bond is paying a 6% interest rate (paying $3 twice a year) and the investor buys that bond at the end of April, there is $2 of interest already built up, so the bond should trade for $102.

Bond pricing, performance and payments are often quite complex and difficult to understand, because unlike equities where investors generally look primarily at its current market price vs. purchase price to see if they made money on their investment, bonds require analyzing both the purchase price AND coupon payments received.  As described above, there are many times when a bond investment may appear to have a negative return from a price perspective, but has often provided a positive return once you have included the coupon payments.

Illustration of Pricing of Bonds A and B from the article

Bond A Pays a 5.0% coupon.  Bond B pays a 3.0% coupon.  Both bonds mature in 5 years, September 30, 2018.

Annual Coupon Payments Bond A Bond B
September 30, 2014 $5.00 $3.00
September 30, 2015 $5.00 $3.00
September 30, 2016 $5.00 $3.00
September 30, 2017 $5.00 $3.00
September 30, 2018 $5.00 $3.00
Total Payments: $25.00 $15.00
Difference: +$10 Bond A trades at premium due to higher coupon payments
Lorne Zeiler
Written By:
Lorne Zeiler, MBA, CFA
VP, Wealth Advisor
Lorne can be reached by email at lorne@tridelta.ca or by phone at
416-733-3292 x225
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