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Author: joelcorley Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35387  
Subject: Re: Union Carbide (DOW) 7.75 of '96 Tender Offer Date: 3/4/2011 11:53 AM
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brewer12345,

You wrote, I would call your broker and see how they have it set up for you to submit for the early tender. The reason I suggest putting in for the min price in the range is that you'd have a better chance of getting taken out at whatever the dutch auctioon price turns out to be.

I have to admit, I had a bit of a "DOH!" moment this morning while I was in the shower.

I'd skimmed through the first part of the Offer to Purchase document and had actually called E*Trade and submitted my order to tender the bonds with a Clearing Spread of 270. Then in the shower I realized that I was looking at this backwards and felt kind of stupid.

The Offer to Purchase breaks the spread into two parts and it does this for very good reason - which it actually explains further down in the document. The first spread is the Base Spread, which is 290bps in this case. That number is fixed. The second spread is the Clearing Spread Premium, which is the number you submit. The maximum Clearing Spread Premium is 30bps.

Base Spread - Clearing Spread Premium = Clearing Spread.

As everyone here knows, yield and price have an inverse relationship in secondary market bonds. Same goes with the Clearing Spread. The higher it is, the lower my price! DOH!

What was I thinking? I was shooting for a yield that would be a little OVER what I could buy an acceptable replacement for - I should have been shooting for a yield UNDER what I could find as a suitable replacement!

Now I have to decide whether or not a clearing spread of 270 is really acceptable. In reality 260 gets me a yield that I can just barely replace. It will be hard to get an equivalent yield in a BBB- issue I like, but I'm fairly confident I can do it. $30/bond just makes it worth my time.

I haven't done the math, but accepting a Clearing Spread Premium of 20bps probably erodes half of that bonus money. At that point, is it worth my time? Should I withdraw my acceptance? Should I change my offer? I'm not sure. Obviously if other bond holders believe the same as I do, they won't accept less than a 30bps premium; however, I'm looking at retail bond prices - an institutional bond holder might see the 0bps Clearing Spread Premium as a good deal simply because he's getting better pricing for replacement bonds.

Thoughts? [I'm probably going to make any decision to change the order in the next hour...]

- Joel
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