The Bond Butcher
Bond investing made
rational, accessible, liquid and transparent
EXECUTIVE SUMMARYBond Butcherâ€“Bond portfolio management made rational, accessible, liquid and transparent.
Mission: To help people become better bond investors.
How It Works:Bond Investing. Simplified.
We give you access to Bond investment opportunities that traditionally have only been accessible to very wealthy institutions and individuals.
1. Invest for as little as as you like in a wide variety of bonds (normally available only in large blocks). Your bonds have been pre-vetted by our experts.
2. Relax Your investment entitles you to potential income and appreciation without the hassles of direct bond ownership in large numbers or amounts.
3. Get paid - You reap the rewards through cash distributions generated from income and appreciation.
Why CrowdInvesting in Bonds?Over 95% of the world's money is debt. But the debt is generally only available in large amounts and is hard to liquidate or diversify.
Have you ever found bond buying hard?
An opaque market with
Large Spreads and
Bond Butcher has:
custom tranche sizes,
fractional bond ownerships,
a transparent marketplace,
no hidden markups
no hidden markdowns,
a customized portfolio,
Crowd-sourced purchasing power,
zero yearly expenses,
Estimated portfolio returns,
And all for only $9.99 a trade.
Bond funds have expenses and these can kill your returns. A bond fund expense of 0.5%, compounded over a 30 period for a $1MM investment costs an investor $161k.
Bond Butcher does for bonds what Expedia did for travel.
Bond Butcher lets you control:
Where, when and how much you buy
Where, when and how much you sell
A daily list of all bonds (and bond transactions) held by the bond butcher is generated every night so that investors can check holdings of the bond butcher at any time and from any place.
Large bond tranches can be broken up and reissued to investors without a change in CUSIP, thus enabling greater risk diversification in the fixed income market.
For Accredited Investors, notes can be issued that represent fractional shares in larger face-value bonds.
A daily list of all notes held by the investor is regenerated every night so that investors
check their holdings.
Expected Default Rates and Estimated Return
Expected default rates by bond grade are based on historical data, expected performance, market conditions, and other factors. In general, we update these rates quarterly based on the latest historical data on the Bond Butcher platform.
Expected default rates are provided as an informational tool only, primarily to remind investors that it is inevitable that certain bonds will default. Expected default rates are not intended to be a promise of future results and may not accurately reflect actual default rates. Actual default rates experienced by any individual portfolio may be impacted by, among other things, the size and diversity of the portfolio, its exposure to particular bonds or groups of bonds, as well as macroeconomic conditions.
It is widely recognized that credit rating agencies are fallible. Even so, we must start somewhere and thus assume that credit ratings and published estimated default rates are correct. For example, Moodyâ€™s claims the average 1 year default rate of a Caa-C bond is 19.47% with a standard deviation of 0.75%. The cumulative average default rate over a 3 year period is 39.73% with a standard deviation of 1.59% [Confidence Intervals for Corporate Default Rates, 2007, Moodyâ€™s Investor Service].
S&P indicates The 31-year average for securities rated AAA (the highest rating) and AA were 0.0% and 0.2%, respectively. Comparatively, the default rate among B-rated issuers (the second lowest) was 4.28%, but for the lowest tier, CCC/C, the default rate was 26.85%. Assuming these default rates are correct makes an estimated rate of return on a portfolio routine engineering.
For example, an investor buys a Sears bond with a 12.7% YTM and a rating of Caa3/CCC+. If the default rate is 26.85% then the expected return is 12.7% * (1-0.2685) = 9.29%. That is the complementary probability of default must be 73%, and a 73% chance your dividend will honored. This probability may be improved by Sears having sold itsâ€™ craftsman name for $800MM and by the time left on the bond (6 months).
Diversification of the bond portfolio enables adjustment of the estimate return in accordance with risk appetite, tax implication and yield requirement. Thus, KPIs enable investors to think â€œat the marginâ€ about risk and return.
Finally, there is the issue of default-rate volatility. A debt portfolio with an average yield of 10%, a default rate of 5%, and a recovery rate of 50% is mathematically identical to a risk-free asset with a yield of 7.5%. The problem is, defaults are unpredictable and therefore demand a risk premium. Default-rate volatility can be measured conventionally with standard deviation, with one caveat: default rates are serially correlated (that is, they tend to trend), so the SD understates this risk a bit. The below chart (courtesy of Alexandra Berthault of Moodyâ€™s) demonstrates both the volatility and trending phenomena.
The Team (a video is available here)
Doug Lyon, PhD, PE, RPI, JPL, AT&T Bell Labs, 49 Journal pubs, 3 books, Prof. 23 years, President of the Inventors Association of Connecticut, Stat. Arb, Engineering Entrepreneurship, Enterprise Java, Sole Owner of Bond Butcher.
Brian Wiley, CFA, MBA, NYU, BS Princeton University, CFO, Spot On Networks, Cap raise of $17MM, LivePerson, IPO, Senior Director Finance, prior broker experience, Business Adviser for Bond Butcher
Mark Noonan, MBA, Wharton, UBS Head of Arbitrage Products â€“ Equity Derivatives for 7 years, serial entrepreneur, Business Adviser for Bond Butcher
Bill Caltagirone, MBA, Umass, Amerst, BA Duke University, Federal Reserve Bank of New York, Managing Director BC Capital Management, Dreyfus Fund, Falcon Fund, Mortgage Industry Advisory Corporation (MBS, M&A debt valuation). Business Adviser for Bond Butcher