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Author: Crosenfield 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 35361  
Subject: Re: bonds - free lunch? Date: 4/30/2000 9:22 AM
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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
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