Most Popular
1. THE INFLATION MONSTER is Forecasting RECESSION - Nadeem_Walayat
2.Why APPLE Could CRASH the Stock Market! - Nadeem_Walayat
3.The Stocks Stealth BEAR Market - Nadeem_Walayat
4.Inflation, Commodities and Interest Rates : Paradigm Shifts in Macrotrends - Rambus_Chartology
5.Stock Market in the Eye of the Storm, Visualising AI Tech Stocks Buying Levels - Nadeem_Walayat
6.AI Tech Stocks Earnings BloodBath Buying Opportunity - Nadeem_Walayat
7.PPT HALTS STOCK MARKET CRASH ahead of Fed May Interest Rate Hike Meeting - Nadeem_Walayat
8.50 Small Cap Growth Stocks Analysis to CAPITALISE on the Stock Market Inflation -Nadeem_Walayat
9.WE HAVE NO CHOICE BUT TO INVEST IN STOCKS AND HOUSING MARKET - Nadeem_Walayat
10.Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - Nadeem_Walayat
Last 7 days
China Bank Run Protests - Another Potential Tiananmen Square Massacre? - 11th Aug 22
Silver Coin Premiums – Another Collapse? - 11th Aug 22
Gold-to-Silver Ratio Heading Lower – Setup Like 1989-03 - 11th Aug 22
Severe Stocks Bear Market: Will You Be Among the Prepared 1.5%? - 11th Aug 22
There's a Hole in My Bucket Dear Liza, UK Summer Heatwave Plants Watering Problem Song - 11th Aug 22
Why PEAK INFLATION is a RED HERRING! Prepare for a Decade Long Cost of Living Crisis - 9th Aug 22
FREETRADE Want to LEND My Shares to Short Sellers! - 8th Aug 22
Stock Market Unclosed Gap - 8th Aug 22
The End Game for Silver Shenanigans... - 8th Aug 22er
WARNING Corsair MP600 NVME2 M2 SSD Are Prone to Failure Can Prevent Systems From Booting - 8th Aug 22
Elliott Waves: Your "Rhyme & Reason" to Mainstream Stock Market Opinions - 6th Aug 22
COST OF LIVING CRISIS NIGHTMARE - Expect High INFLATION for whole of this DECADE! - 6th Aug 22
WHY PEAK INFLATION RED HERRING - 5th Aug 22
Recession Is Good for Gold, but a Crisis Would Be Even Better - 5th Aug 22
Stock Market Rallying On Slowly Thinning Air - 5th Aug 22
SILVER’S BAD BREAK - 5th Aug 22
Stock Market Trend Pattren 2022 Forecast Current State - 4th Aug 22
Should We Be Prepared For An Aggressive U.S. Fed In The Future? - 4th Aug 22
Will the S&P 500 Stock Market Index Go the Way of Meme Stocks? - 4th Aug 22
Stock Market Another Upswing Attempt - 4th Aug 22
What is our Real Economic and Financial Prognosis? - 4th Aug 22
The REAL Stocks Bear Market of 2022 - 3rd Aug 22
The ‘Wishful Thinking’ Fed Is Anything But ‘Neutral’ - 3rd Aug 22
Don’t Be Misled by Gold’s Recent Upswing - 3rd Aug 22
Aluminum, Copper, Zinc: The 3 Horsemen of the Upcoming "Econocalypse" - 31st July 22
Gold Stocks’ Rally Autumn 2022 - 31st July 22
US Fed Is Battling Excess Global Capital – Which Is Creating Inflation - 31st July 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

How to Get Higher Interest Rates on Safer Bonds

Interest-Rates / Corporate Bonds Dec 04, 2013 - 12:48 PM GMT

By: Investment_U

Interest-Rates

Steve McDonald writes: The bond market is a difficult place to earn a livable income during times of very low interest rates. The only way to earn a decent yield is to take risks on lower-quality bonds or to accept much longer maturity curves than good sense dictates.

But if you know where to look, there’s a virtually unknown feature in some bonds that can significantly increase your current income and beat the biggest threat to your money in the current bond market, while offering the increased level of safety that bonds are known for.


This almost-too-good-to-be-true trait is called a “death put.” It works in every portfolio, but it’s especially effective for those in or near retirement who need higher income and higher quality.

A death put enables the estate of a deceased bondholder to sell the bond back to the issuer at par. No matter how low the price has dropped, a bond with a death put matures at par upon its owner’s death.

And this unique quality normally doesn’t cost any more than a bond with traditional maturity features.

The Danger of the Long Curve

Maturity risk is where most bond buyers will lose a lot of money in the next few years.

The longer the maturity of a bond, the higher its coupon, which is why in this zero-interest rate environment most investors are buying them.

But bonds with longer maturities also drop more in value when rates go up. That’s where the unsuspecting bond buyer is going to lose a lot of money.

The only options are to hold more price-stable, short maturities and suffer through low yields, or accept longer maturity curves and watch your principal vaporize when rates move up.

But with a death put, you know before you buy a bond that – in the most likely scenario of falling bond prices and increasing rates – your bond prices will reset to par when you die.

This strategy may appear self-defeating because the owner doesn’t benefit from the price increase. But in addition to protecting your estate from what will most certainly be lower bond prices, the death put allows you to go way out on the maturity curve for higher current income from higher quality bonds.

Death Puts in Action

Here’s a very long maturity bond that, without a death put, would be crazy to own in this market. It’s a Prospect Capital (Nasdaq: PSEC) bond that matures on May 15, 2043!

That’s 23 years too long for this market unless you have a death put.

A bond without a death put with a maturity this long would drop at least 50% when rates finally move up. But because it will reset to par when the owner dies, the potential price fluctuation is negated.

In fact, it is priced at $960 so it will actually have a small capital gain of $40 per bond when it resets.

But what really makes this a great deal for a retired person looking for livable income is that it is rated BBB and pays a coupon of 6.25%. That’s at least two to three times what you can get from a BBB-rated bond with a shorter maturity.

You can also use a death put with shorter maturities. The benefits are not as great as on the longer end of the maturity curve. But it will add one more layer of safety in what promises to be a very tough market for the unprepared.

For example, there’s a Cenveo (NYSE: CVO) bond with a death put and a maturity of just 3 1/2 years that, in a worst-case scenario, will pay about 10% a year. But it is rated CCC.

CCC is a whole world away from the safety of an investment-grade BBB.

In this environment, where we know bond prices will drop – and this one’s CCC rating means it will drop more than higher-rated bonds – the death put will give its owner the additional assurance that at some point, either at his death or at maturity, he will recoup any market fluctuation.

Extra Assurance

This extra assurance will make all the difference between panic selling at a loss when rates finally spike and staying put. Riding out market fluctuation is how you really make money in bonds.

Obviously, a BBB bond paying 6.5% will be more appealing to a retired person who needs the additional security. But a bond that pays 10% as a worst-case scenario, with a super-short maturity for price stability and the extra safety that a death put adds, is also a viable option for most investors.

Death puts are not common but they are out there. And they may be the only viable option for retired persons who need high income from high-quality bonds.

Good investing,

Steve

Source: http://www.investmentu.com/2013/December/how-to-get-higher-rates-on-safer-bonds.html

http://www.investmentu.com

Copyright © 1999 - 2013 by The Oxford Club, L.L.C All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Investment U, Attn: Member Services , 105 West Monument Street, Baltimore, MD 21201 Email: CustomerService@InvestmentU.com

Disclaimer: Investment U Disclaimer: Nothing published by Investment U should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investment advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Investment U should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Investment U Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in