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Author: pauleckler Big funky green star, 20000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35400  
Subject: Re: bonds - free lunch? Date: 5/1/2000 12:01 PM
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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 $$.
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