Hello, is the following a good strategy:Buy discounted bonds a month or 2 before they mature, then redeem for face value. So if I buy at "98," then get "100" at maturity, and do this every month, I would get 24% interest. (excluding bonds that default)By the same token, isn't it good to buy discounted bonds that you expect to be called in the near future, then you get a profit of face value minus purchase price, instead of having to wait till they mature?Thanks,-Alex
It's good work if you can get it. Generally the market figures these things out and there isn't a lot of extra you can get. People watch those things fairly closely. In 1988 I sold a house in Michigan and movd to California, where I discovered the money from the sale of a fairly nice 3 bedroom house on a lake would pay a down payment on a crackerbox on a tiny lot in Orange County. On the other hand, I could rent an apartment for less than the interest payment on the crackerbox mortgage would be. So I bought bonds in quite a good market, mostly high coupon bonds, but one was a PA Bell Telephone bond with a 4.75% coupon bought at almost a 50% discount from face. In 1993 my high coupon bonds were almost all called away, and I had to find replacement investments in a much lower interest rat environment. But my point is that the one that was NOT called away, and will mature next year, is the PA Bell bond. Since I got it at 55 cents on the dollar, it has fathfully paid me some 9% interest through the years plus next year when it matures wll give me full face. The lesson I learned is that one may do much better to take a low coupon bond at a discount rather than a higher coupon one. So your suggestion is right, but I'd be leery of one priced to offer a yield to maturity of 24%. I'd worry about default. Nothing the matter with looking for something, a mis-pricing by the market or perhaps you know something others don't (careful about acting on insider information, not legal) then go ahead. Good luck! In addition to bonds, many preferred stocks are issued wiith 5 year call dates. Mostly they are callable at a price of 25 (sometimes 50). Most of the ones you see in the paper at 19 or 20 a share are callable at 25, 5 years from when they were issued. Many of these are now paying quite attracttive interest rates. If you now buy a good quality preferrred, such as one issued by Merrill Lynch as an example, your broker may be able to tell you when that issue s callable. If the interest rates over the next couple years trend upward, chances of it being called are quite good. The caveat on calls, of course, is if you pay a premium for a bond, and enjoy the nice interest rate for only a year or two, then it gets called away. So call dates are one of the things you want to watch carefully when buying bonds. Chris
Chris made some excellent points. Buts lets emphasize when bonds pay very high yields it is usually because there is some credit difficulty. So make sure you check the bond ratings before you buy. The broker or dealer can help in this regard, but the best source is usually the 4 volume S&P book, that you can find in the reference department of your library. They also list preferreds and their call provisions.Now that interest rates are up there, preferreds may be a better buy than they were. For a while, many were priced at a premium over their call price. This means you can get them called out from under you at a loss. In fact when preferreds are close to their call dates, they frequently are priced close to the call price or at a premium. Near term call date can explain some of the unusually high or low (off market) yields published for some of them in the newspaper.You still have the problem with preferreds that they may or may not be called, but their share value will decrease when interest rates increase. Companies are likely to call their preferreds when interest rates are low. They can essentially refinance the call by borrowing at lower rates. When rates are up they are less likely to call their preferreds. This can stick you with paper losses for a long time. Unlike bonds, preferreds do not have a maturity date. So there is no guarantee they will ever be called. Some companies, like Union Electric, however, do have a policy of retiring a fraction of their preferreds every year. So if you have a callable preferred that is expensive to them in terms of dividends it may well be called anyway.These are sound investments most of the time, but do your homework before you commit your $$.
Thanks guys :)
An even better strategy is is buy corporate whose cash flow and earnings are increasing. These are candidates for rating upgrades that will bring some nice cap gains. Last fall I bought some 11.75% Dictaphones @ 73 due in 7 years. I sold them out last month for 98. Without a Bloomberg, it still beats the pants off of so many of these "astute" traders. I believe that the objective is to continue to make money, now satisfy my ego. There are many other credits that will improve substantially over the next few months with double digit coupons. These should out-perform many equities on a total return basis.
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