Planning for two people in two different stages of life!

How will the Investors do? Part 5

Investor "A" Bought;

4 Ford Motor Credit Corporation 5.25% of 06/22/2009 paying $816.90 per bond or $3,267.60 principal. Investor "A" paid $10.95 for the broker’s commission and $95.22 to the bond seller for interest from December 22, 2008 to January 8, 2009 (the settlement date), since this bond issue pays interest twice a year on June 22 and December 22. The investor will get this money back on the next interest payment date, June 22, 2009. These 4 bonds will pay $105.00 to this investor on June 22, 2009. The investor will also get the principal of the 4 bonds or $4,000. Investor "A" paid $3,373.77 for the total transaction. The total returned on June 22, 2009 will be $4,105 to make another investment. That is a return of $731.23 or a simple 21.674% return in 166 investment days.

3 Royal Caribbean Cruises 8% of 05/15/2010 paying $890 per bond or $2,670 principal. Investor "A" paid $10.95 for the broker’s commission and $35.51 to the bond seller for interest from November 15, 2008 to January 8, 2009 (the settlement date), since this bond issue pays interest twice a year on May 15 and November 15. The investor will get this money back on the next interest payment date, May 15, 2009. These 3 bonds will pay $120.00 to this investor on May 15, 2009. The bonds will pay another $240 from May 15, 2009 to May 15, 2010. The total interest paid to Investor "A" by maturity will be $360. The investor will also get the principal of the 3 bonds or $3,000. Investor "A" paid $2,716.46 for the total transaction. The total returned on May 15, 2010 will be $3,360 to make another investment. That is a return of $643.54 or a simple 23.69% return in investment 18 months.

Investor "A" started with $8,400. They invested $2,716.36 in Royal Caribbean Cruises and $3,373.77 in Ford Motor Credit Corporation for a total of $6090.13. Investor "A" kept $2,309.87 in his interest giving brokerage account, buying 6 month CDs.


Investor "B" Bought;

10 Ford Motor Credit Corporation 5.25% of 06/22/2009 paying $816.90 per bond or $8,169 principal. Investor "B" paid $10.95 for the broker’s commission and $24.45 to the bond seller for interest from December 22, 2008 to January 8, 2009 (the settlement date), since this bond issue pays interest twice a year on June 22 and December 22. The investor will get this money back on the next interest payment date, June 22, 2009. These 10 bonds will pay $525 to this investor on June 22, 2009. The investor will also get the principal of the 10 bonds or $10,000. Investor "B" paid $8,204.40 for the total transaction. The total returned on June 22, 2009 will be $10,525 to make another investment. That is a return of $2,320.60 or a simple 28.285% return in 166 investment days.

10 Ahold Finance USA Inc 8.25% of 07/15/2010 paying $1,000 per bond or $10,000 principal. Investor "B" paid $10.95 for the broker’s commission and $396.68 to the bond seller for interest from July 15, 2008 to January 8, 2009 (the settlement date), since this bond issue pays interest twice a year on July 15 and January 15. The investor will get this money back on the next interest payment date, January 15, 2009. These 10 bonds will pay $412.50 to this investor on July 15, 2009. The bonds will pay another $825 from July 15, 2009 to July 15, 2010. The total interest paid to Investor "B" by maturity will be $840.82. The investor will also get the principal of the 10 bonds or $10,000. Investor "B" paid $10,407.63 for the total transaction. The total returned on July 15, 2010 will be $10,840.82 to make another investment. That is a return of $840.82 or a simple 8.08% return in 17 investment months.

5 Hertz Corp 9% of 11/01/2009 paying $980 per bond or $4,900 principal. Investor "B" paid $10.95 for the broker’s commission and $85.07 to the bond seller for interest from November 1, 2008 to January 8, 2009 (the settlement date), since this bond issue pays interest twice a year on May 1 and November 1. The investor will get this money back on the next interest payment date, May 1, 2009. These 5 bonds will pay $225 to this investor on May 1, 2009. The bonds will pay another $225 from May 1, 2009 to November 1, 2009. The total interest paid to Investor "B" by maturity will be $450. The investor will also get the principal of the 5 bonds or $5,000. Investor "B" paid $4,996.02 for the total transaction. The total returned on November 1, 2009 will be $5,450 to make another investment. That is a return of $453.98 or a simple 9.09% return in investment 297 days.

Money left out of the $25,000 went back into the IRA account for future investments.
These are big returns for income producing securities. So that also means that the risks are big as well. Nothing in the world of finance is guaranteed. The larger the potential for returns, the larger the risk taken by the investor. Business conditions can get worse for these companies to the point where they cannot go on paying interest or principal. Here is the reason why both investors are keeping their time in each investment short.

What would happen if the corporations invested in when Chapter 11? We will see in our next part.

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.

Another Guide to Risk Evaluation

Reviewing Credit Ratings: Part 3

We have learned about risks and the three types of people in the market. Now we are going to look at another tool used by Corporate Bond Investors in figuring out what issues will pay and which ones will not pay. Credit ratings are one of several tools that investors can use when making decisions about purchasing bonds and other fixed income investments. There are several different credit rating agencies around the world that do the same thing. We are going to focus on one agency called Standard and Poor’s.

Credit ratings are opinions about relative credit risk. Nothing in credit ratings are written in stone. As a matter of fact, financial conditions of corporations may change for the better or worst before a new rating is given. That means that credit ratings are not a guarantee of credit quality or a predictor of future credit risk. Credit ratings are not an indication of market liquidity of bonds or its price in any secondary market. Credit ratings should not be taken as investment advice. They should never be taken as buy, hold, or sell recommendations. They are just one factor investors may use in making investment decisions.

Credit ratings give investors an efficient, widely recognized, and long-standing measure of credit risk. Investors and other market participants can use the ratings as a screening device to match the relative credit risk of an issuer or individual bond issue with the investor’s own risk tolerance or credit risk guidelines. That way they can use these ratings in making investment and business decisions. But keep in mind, there are future events and developments that cannot be foreseen. That is why the assignment of credit ratings is not an exact science.

To assess the creditworthiness of an issuer, Standard and Poor’s evaluates the issuer’s ability and willingness to repay its obligations in accordance with the terms of their obligations according to the contract called the Indenture. Ratings express relative opinions about the creditworthiness of an issuer or credit quality of an individual bond issue, from strongest to weakest in relation to credit risk. A corporate bond that is rated as “AAA” is viewed by the rating agency as having a higher credit quality than a corporate bond with a “CCC” rating. But the “AAA” rating is not a guarantee that it will not default. It only means that in the opinion of Standard and Poor’s, it is less likely to default than the “CCC” bond.

Banks, insurance companies, endowments, and other financial institutions usually must invest in investment grade securities. According to Standard and Poor’s ratings, they range from “AAA” to “BBB-“. If the investment falls below this range, they usually must divest of these securities. The sudden supply in the market can make these securities decline in price, causing the yield to rise. Sometimes, securities are upgraded to investment grade. These same institutions can invest in them causing demand, making the price of these securities to rise. One study suggests that 25% of all non-investment grade securities rise to investment grade.

Here is the incentive to invest in non-investment grade or speculative grade for the individual investor or speculator. Here are the ratings used by Standard and Poor’s;

Investment Grade Ratings

AAA – Extremely strong capacity to meet financial commitments.
AA – Very strong capacity to meet financial commitments.
A – Strong capacity to meet financial commitments but can be affected by economic conditions and changes to circumstances.
BBB – Adequate capacity to meet financial commitments but is more affected by economic conditions
BBB- -- Consider the lowest Investment Grade by the investment community.

Non-Investment Grade Ratings

BB+ -- Consider the highest Non-investment Grade by the investment community.
BB – Less vulnerable in the near-term but faces major ongoing uncertainties to adverse business, financial, and economic conditions
B – More vulnerable to adverse business, financial, and economic conditions but currently has the capacity to meet financial commitments
CCC – Currently vulnerable and dependent on favorable business, financial, and economic conditions to meet financial commitments
CC – Currently highly vulnerable
C – A bankruptcy petition has been filed or similar action taken, but payments of financial commitments are continued
D – Payment default on financial commitments

No Rating

NR – This indicates that no rating has been requested or that there is insufficient information on which to base a rating. Standard and Poor’s does not rate a particular obligation as a matter of policy.


I look for bonds that have not been rated before looking for any other bonds because coupled with a positive income statement, they can be a good secure means of income. I only invest in “D” rated securities when I have a good hunch that the bonds will pay off with a high return in the very near future. In this economic depression, I try to stick to the highest short term non-investment grade bonds that I can.

That brings me to our next topic where we will look at short term versus longer term maturity corporate bonds.


Corporate Bonds to Study

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

$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

$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+

$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+

$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+

Knowing the Risk

Taking Charge of Your Investments: Part 2

Bernard Madoff, allegedly ran the largest Ponzi scheme in US Investment History, milking $50 Billion from investment firms, pension funds, nonprofit corporations, wealthy retirees, and large investors. How did he do it with the Securities and Exchange Commission (SEC) regulating the industry and auditors, auditing his investment fund? The SEC is made up of political appointees who come from investment firms. That is like having the fox guard the hen house. The objective of the auditor is to get paid. They are not interested in blowing the whistle on the firm. If they did, who would want to hire them to audit their firm? They just want someone to approve what they are doing so that the public would trust them. This is why people like Mr. Madoff can milk the life savings out of the investing public. That is why you, the investing public must learn to invest your money. No one but you can be trusted with looking out for your best interest.

We will start by learning the three classifications of investment policies that people follow. First is the investor. That is a person who knows how much money they are starting with to invest. They know how much money they expect to make in a certain period of time and how much money they will have at the end of the investment.

Second is the intelligent and unintelligent speculator. The intelligent speculator is a person who analysis the security to determine its quality and prospects. They will also evaluate the risk of the security. Then the person will commit to making the investment. The unintelligent speculator will go on the bases of the information supplied by the sales person suggesting or selling the investment. People who act on tips are unintelligent speculators. These are the people who Bernard Madoff attracts.

The third person is the gambler. That person will commit money or property to a venture with little or no chance of success to make big gains or profits. One example would be a person who buys Pennsylvania Lottery Tickets or a bet on a race horse to win. Usually they loose more money than they make.

The investor and the intelligent speculator must know the many risks associated with investments. Even just holding cash has its risks. Interest rate risk is when interest rates rise unexpectedly, making income investments like corporate bond prices fall. Your cash as well as investments can be in danger because of purchasing power or inflation risk. Inflation Risk is when the purchasing power of money falls causing you to use more dollars to buy the same amount of goods and services. So if you had a dime in 1970, you could have bought a large candy bar. Today, you would need a dollar to buy that same candy bar.

Common Stocks rise and fall. Investors might have to sell or because of emotions will sell stocks at a loss. Risk in this area is measured in degrees of stock volatility in a given stock or portfolio. This is known as Market Risk.. This is related to psychological risk. That is being influenced by waves of great optimism or pessimism in the financial markets or in individual stocks. This is also related to investing in fads like alternative fuels or faddish coffee shops.

Non-investment Grade Bond Investors are subject to Credit, Financial, or Business Risk. That is the risk that corporation’s credit and cash position will deteriorate due to business conditions or bad management decisions. The company may file for bankruptcy or go out of business causing a loss to the investor.

Below are three investments representing companies that have been in the news. All three have the potential to make a lot of money for the investor provided that they stay in business until their bonds mature. In my opinion Ford is the better investment as far as Business Risk.

$1,000 Bond issued by Ford Motor Credit Corporation 5.25% of 06/22/2009, price is $816.90, Yielding to Maturity 49.691%.

$1,000 Bond issued by Ford Motor Credit Corporation 5.25% of 12/21/2009, price is $693.60, Yielding to Maturity 45.517%.

$1,000 Bond issued by General Motors Acceptance Corporation 4.15% of 04/15/2009, price is $769.70, Yield to Maturity 94.545%.

Introduction into the Corporate Bond World Part 1

This is a blog that is devoted to saving and investing in corporate bonds. Bond investing has been ignored in this country because brokers and bankers can’t make money in it unless you the investor invest millions at a time in this instrument. They only push bond investing when mutual funds are involved. If you ask your broker about investing in Corporate Bonds, they will confuse the issue and start talking about the favorite bond mutual fund of his firm. The reason?

With a mutual fund, the broker makes a monthly commission. If it is a front end load fund, they make money up front. If it is a back end load fund, they make money when you sell. Sometimes, they make money all three ways. They make money if the fund goes up. They make money if the fund goes down.

But if you buy the corporate bond directly from the broker, they make very little money. As a matter of fact, with some firms, you can buy a $1,000 bond, paying a commission of $10.95. If you wait until maturity, you never have to pay a broker again. If you decide to sell your investment before maturity, you will have to pay another $10.95. One such firm that charges as little as $10.95 per transaction is Zions Direct.

https://www.zionsbank.com/zd_index.jsp

Zions Direct has a 24,000 bond inventory of quality and junk bonds to choose from. The Corporate bond market is not like the stock market. That is, most stocks traded are on exchanges or an organized "Over the Counter" Market. Most Corporate Bonds are bought and sold on the Bond Market or a Bond "Over the Counter" Market. The volume traded is a lot lower or trading is a lot thinner than the trading in the stock market.

As I explained in my book, "Building Wealth With Corporate Bonds," in this market, investors can make more money than in the stock market at lower risk. In the book written in 2003, When I published the book, the actual point in that Dow Jones industrial Average stood at 9,523.27 on Sept. 02, 2003. On Sept. 11, 2008 the Dow stood at 10,917.51. If you could have invested in the Dow at that time, you would have made 1,394.24 or 14.6% over 5 years. But if you would have bought Great Atlantic & Pacific Tea Company 9.125% of 12/15/2011 bonds at the same time for $800, you would have gotten 11.41% per year, for five years. If you sold the bond on Sept. 11, 2008, you would have gotten $1,050, $250 per bond more than what you paid for it. But you would have had the option to keep the bonds until maturity getting $1,000 per bond on Dec. 15, 2011. That means you would get 11.41% per year for 8 years plus $200 more at maturity. All you have to fear is bankruptcy of the company. Even then, you are in a better position to get your money back then the stockholder.

My short term High Risk Bond Picks for future investing;

Hertz Corp 9% of 11/01/2009 Yield 11.364% Recent Price $980

Royal Caribbean Cruises 8% of 05/15/2010 Yield 12.885% Recent Price $890

Ahold Finance USA Inc 8.25% of 07/15/2010 Yield 8.24% Recent Price $1,000