Researching and Evaluating Your Investments

What to do about the Risk: Part 4

We looked at how you can look at the risk and judge for yourself if is worth the time and money to chase after the Corporate Bonds that you are evaluating. The future is not promised to anyone. That is why when committing money to investments; you must think about how much time in the future, you want to commit to. You must think in terms of "Short Term" that is 1 day to 365 day out. "Intermediate Term" is from 366 days through 4 years out. Last is "Long Term" or after 4 years out.

You as an investor can look at the evaluated list of bonds below and determine what you want to do, based on the economic conditions of the country, the business conditions of the industry as well as the company, and your investment needs.

Corporate Bonds that you have evaluated;

1. $1,000 Bond issued by Hertz Corp 9% of 11/01/2009 Recent Price $980, Yield to Maturity 11.364%, S& P Rating = NR

2. $1,000 Bond issued by Royal Caribbean Cruises 8% of 05/15/2010 Recent Price $890, Yield to Maturity 12.885%, S& P Rating = BB

3. $1,000 Bond issued by Ahold Finance USA Inc 8.25% of 07/15/2010 Recent Price $1,000, Yield to Maturity 8.24%, S& P Rating = BB+

4. $1,000 Bond issued by Ford Motor Credit Corporation 5.25% of 06/22/2009, price is $816.90, Yielding to Maturity 49.691%, S& P Rating = CCC+

5. $1,000 Bond issued by Ford Motor Credit Corporation 5.25% of 12/21/2009, price is $693.60, Yielding to Maturity 45.517%, S& P Rating = CCC+

Let’s look at two IRA investors. They see that we are entering a bad recession; if not a depression so investing in Long Term Corporate Bonds is "out of the question." Many companies that had good earnings every year are reporting losses now. It seems like having "Going out of Business" sales is the normal way of doing business. Every day they pick up the paper and see someone filing Chapter 11. The 5 companies that they have reviewed are reporting negative earnings and at least one is rumored to be on the edge of bankruptcy (GM was deleted from the list). They buy their investments on December 31, 2008. The settlement date for their investments is on January 8, 2009, 5 business days after purchase.

IRA Investor "A" is 28 years old and is just starting out in the high finance investing business. They have been placing an average of $100 per month in IRA CDs at their local Credit Union for 7 years (Total to invest $8,400). They are ready to invest this money in Corporate Bonds. Investor "A" bought 4 Ford Motor Credit Corporation 5.25% of 06/22/2009 because the CEO of the company and all that this investor read from the internet analyst say that this company will be able to last until the end of 2009. Royal Caribbean Cruises 8% of 05/15/2010 is just out of Investment Grade Range and give a higher yield than the other "BB" bond that this investor studied. Three bonds are also purchased. Besides, Royal Caribbean Cruises is only 17 months from maturity and from what the investor has read they should be able to continue to pay its bills until that time. At age 28, this investor can afford to make some mistakes with plenty of time to recover before retirement. So the risk of being wrong is not critical.

Investor "B" is 54 years old. This investor has $100,000 in their IRA and has $25,000 in cash to place in investments. This investor can afford to diversify into more bonds but now this investor’s time in the work force is more limited. Investor "B" may also be more of a target for Corporate layoffs since senior employee salaries are higher than the younger workers and their education level may be more "out of date" then their younger counterparts. Usually, it is not worth the tens of thousands of dollars to upgrade their education to work another 10 to 15 years. So they can’t afford to take as much investment risk as the younger people.

Investor "B" buys 10 Ford Motor Credit Corporation 5.25% of 06/22/2009, 10 Ahold Finance USA Inc 8.25% of 07/15/2010, and 5 Hertz Corp 9% of 11/01/2009. Investor "B" believes that Ford will stay in business until at least July 2009. Ford is best positioned out of the "Big Three." The investor cannot find any evidence to suggest that Ahold, a holding company that owns Giant Foods, operating in Central Pennsylvania will go out of business before 2011. And the investor read that Hertz Corporation whose industry is seeing hard times, is positioned as the best financially in its industry.

Next time, we will look at how much money these two investors will make and how much they will have in expenses.