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Author: fminio Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35345  
Subject: General Motors 8,375%: help? Date: 9/13/2007 3:57 PM
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I am fairly new to bonds and was wondering if anyone could help out.

- X94364 - General Motors 8,375%.
- can be picked up for around 80
- repayment 100
- yield: 8,25%
- current yield: 10,68%
- maturity: 2033

Famous last words: what can go wrong? I mean, assuming one believes that GM will not default, isn't this a pretty good deal?

I am sorry if this is a stupid question...any views are welcome!

Thanks.
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Author: theHedgehog Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21616 of 35345
Subject: Re: General Motors 8,375%: help? Date: 9/13/2007 4:02 PM
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- maturity: 2033

Famous last words: what can go wrong?


This comes under the "any views welcome" category:

GM can't even get it right, now, while we have as much oil as we want. What will they do over the next 26 years as oil gets scarce and finally disappears?

Hedge

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Author: Wradical Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21617 of 35345
Subject: Re: General Motors 8,375%: help? Date: 9/13/2007 4:12 PM
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Famous last words: what can go wrong? I mean, assuming one believes that GM will not default, isn't this a pretty good deal?
______________________________________
Sure - BUT

The price and yield you see reflect a strong sentiment in the market that GM MAY VERY WELL DEFAULT.

To realize that yield to maturity, you have to hold it for the full period - to 2033. I'll be 80 that year - so maybe even money I'd live to collect. But I'd give even better odds that I'll outlive GM, as we know it. And I can't believe that's even something I can think.

Bill

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Author: fminio Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21618 of 35345
Subject: Re: General Motors 8,375%: help? Date: 9/13/2007 4:14 PM
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OK - I take your point but if they haven't gone bankrupt by now....

anyway, I doubt that the government would let them fade away. They might not survive in the current form but we never know. In any case, I would be willing to take my chances.

but assuming that they will not default - is there anything else to take into consideration? As far as I see:

- it is a good deal if you think they will survive - very good
- stupid investment if you don't believe they will be around...

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Author: fminio Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21619 of 35345
Subject: Re: General Motors 8,375%: help? Date: 9/13/2007 4:19 PM
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sorry this might be silly but:

- when the bond is at 100, they pay 8,5% per year - correct?
- currently you would be getting around 10%

+8,5% is pretty good and if in the next year of so the price goes up you can also make a profit on the price of the bond?

wishful thinking?

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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: 21620 of 35345
Subject: Re: General Motors 8,375%: help? Date: 9/13/2007 4:24 PM
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fminio, the yield is great but only if you get your money back in 2033 (or whenever you plan to sell). If you buy at 80 and get 100 back in 2033, those are very nice capital gains.

The problem is that no one can be sure that GM will still be around in 2033. And any of a variety of things can happen between now and then which will cause you to lose your investment.

In particular, GMs total assets are probably tied up with their labor contracts to provide health insurance and pensions for retirees. A strike could bankrupt GM. Unions might take control of the company. Bond holders might get nothing if this happens.

To survive, GM needs concessions from its unions. Unions seem to be coming around to the idea that concessions that keep GM in business is best for everyone in the long run. But that is iffy until its a done deal. And as soon as GM gets on its feet, expect unions to want an increased share.

GM also has the problem that it makes money mostly with large gas guzzlers. Small economical vehicles have always been losers for them. They need to downsize overhead to the point where those small vehicles can be profitable. They need to chop excess capacity. Lay off many surplus workers. Discontinue the "jobs bank" (which pays surplus workers when they have no work). They also need to come up with some vehicles that are attractive, popular, and sell well. Styling has been a problem. Market share continues to fall. They need to make some very painful, large scale adjustments to survive. Otherwise, the Japanese are going to be the surviving US automakers.

Finally, viewing this just as a bond investment. If a company is doing well, you can probabably guess that it will continue to do well for the next half dozen years or so. Beyond that, it is hard to know as much can change in the economy, govt, competitors, technologies, unanticipated developments, etc, etc. Bond buyers usually prefer to own intermediate term bonds or less. Taht is usually 12 years to maturity or less. Longer than that at least requires a very stable company that you cannot manage going away. Bonds rated less than investment grade (BBB minimum) are not usually suitable for individuals. And especially you do not want long bonds.

So think about it carefully. You are gambling that GM will do OK in all of this. But your money is definitely at risk. If your number comes up, you will wish you had left your money in nice safe, govt insured CDs.

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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: 21621 of 35345
Subject: Re: General Motors 8,375%: help? Date: 9/13/2007 4:29 PM
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"+8,5% is pretty good and if in the next year of so the price goes up you can also make a profit on the price of the bond?"

Where is this bond listed? If it is one of the asset backed securities traded on stock exchanges at discount commissions, you can easily sell at a profit if that happens. But if it is a listed bond or OTC bond, you can only sell it to a bond trader, and those prices are not usually published. Selling the bond will probably cost you a year's imterest in bond dealer mark-up. So no, you can't expect to profit.

If however the bond gets called, GM will probably pay full face value, maybe plus a premium. But they will only do that if they can borrow the money cheaper elsewhere. And that is most likely only if GMss bond rating improves markedly.

Could happen, but risky.

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21622 of 35345
Subject: Re: General Motors 8,375%: help? Date: 9/13/2007 4:36 PM
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sorry this might be silly but:

- when the bond is at 100, they pay 8,5% per year - correct?
- currently you would be getting around 10%

+8,5% is pretty good and if in the next year of so the price goes up you can also make a profit on the price of the bond?

wishful thinking?


If GM manages to stay alive and pay off its debt, you should be able to sell for more than you paid for the bond down the road, or choose to hold to maturity, when Paul is a youthful 80 (from the point of view of an 83 year-old).

Whether GM survives is a matter of debate. I believe the market is actually pricing these for less risk than a year ago (I didn't actually check the numbers). But don't expect a government bailout. Chapter 11 has become very convenient—it only hurts workers and small investors, not executives and turnaround specialists. Bondholders might get some of the crumbs.

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Author: fminio Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21623 of 35345
Subject: Re: General Motors 8,375%: help? Date: 9/13/2007 4:38 PM
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thank you very much for this comprehensive reply - i think you summed the situation up perfectly!

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Author: fminio Two stars, 250 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21627 of 35345
Subject: Re: General Motors 8,375%: help? Date: 9/13/2007 4:46 PM
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X94364 - General Motors 8,375% - FIXED - UNSUBORDINATED

and it says secondary market BUT it also says that it is not callable

i guess that means: no go.

indeed, i was thinking that if rates went down they would be better off buying it back but apparently this cannot happen!

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Author: Lokicious Big gold star, 5000 posts Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 21629 of 35345
Subject: Re: General Motors 8,375%: help? Date: 9/13/2007 5:02 PM
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and it says secondary market BUT it also says that it is not callable

i guess that means: no go.

indeed, i was thinking that if rates went down they would be better off buying it back but apparently this cannot happen!


I don't think Paul was suggesting being callable was a good thing. If conditions for GM improve enough that they are in a position to call in debt securities, a non-callable bond would be quite salable on the open market (for a commission, of course).

Here's one way of thinking of the risk (thanks to our old friend Charlie). You would be getting about 5% per year more for this than a 5% CD (assuming you rolled over the CD year after year). So basically you are betting on GM lasting 20 years.

As Charlie always said about junk, you really need to do the research and not guess. He thought GM was too unpredictable to weigh the risks properly, though that was a while bck.

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