Something that has come up a few times in the past with clients. I’ll purchase a bond for them and they’ll ask “Why did we take a loss on this bond right after we bought it?”. I’ll explain to them that there is no loss, it has to do with how bond dividends are paid.
With a stock, whoever owns the stock when the dividend is paid gets the dividend. But that’s not how it works with bonds. However long you own a bond, you are entitled to your share of the dividend over that period. Say you bought 30 bonds that yield 5%. What that usually means is that you get a payment of $750 twice a year. What if you bought the bond the day before the dividend is due? Do you make an extra $750? No. You actually pay that to the person who owned the bond before you. So if the bond was at par, you’ll pay $30,750 for those bonds, because you’ll collect $750 tomorrow. However, on that first day, you’ll see a $750 ‘loss’. You don’t actually lose anything, it’s just a future payment that you’ve not received yet.