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Author: junkman02 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Re: Buying Zeros & Dealing with Call-Risk Date: 4/21/2009 5:32 PM
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This is a laugh on myself.

I was doing my back-office work just now, logging the trades I did this morning and updating the spreadsheet of my bond holdings. When I logged into my IRA account to look at my holdings, I couldn’t find the Toyota bonds I had bought. I thought that was strange, because Zions updates positions in real time, though cash lags by overnight. But sometimes trades get reversed. I could confirm from reviewing my orders, though, that hadn’t happened. So I shrugged it off, figuring the problem would resolve itself.

Then it dawned on me that the broker was combining two positions I held in Toyota, the 5 zeros I bought this morning and 20 of the same maturity that I had bought last year and had forgotten about. This year’s entry was a bit more favorable, 7.06% YTM, instead of last year’s 6.85% YTM. But 25 bonds of a single maturity is a big position, even if they are zeros. Even worse it that I own 14 of their step-coupons of ’25, plus 3 of their 5’s of ’23. So I’m long a lot of Toyota’s bonds

By face value, my total portfolio exposure to Toyota is now 7.30%. By mark-to-market value, my exposure is a slightly more reasonable 6.96%. But that’s still a serious over-weight if 5% is my preferred maximum exposure to any high-quality corporate issuer. (As credit-quality goes down, I lower my permitted exposure.) I was so busy shopping for bargains that I didn’t realize I was buying a bargain I already owned. Opps.

OTOH, I still do that same trade I did this morning again. Those bonds should have been bought. My instincts about that were correct. Also, my guess is that Toyota will call the fourteen step-coupon bonds of ’25 I own long before they reach maturity. On 02/13, the coupon goes to 6%. On 02/17, it goes to 7%. On 02/21, it goes to 8%. Toyota isn’t going pay that kind of interest on its bonds. Instead, it will call them. Any of those calls will drop my exposure to Toyota (by face value or mark-to-market value) to under 5%. So I’m OK with respect to my long-term, risk-management constraints. It’s just in the short-term that things have gotten out of balance, as they are going to do if the shopping is done when the shopping should be done, which is by the availability of perceived value, not by arbitrary buying schedules (aka, ladders) or inflexible risk-management constraints (which, at best, can only be guidelines anyway).

But, still, I should have been more "heads up" about the situation, no matter the fact that my portfolio is pushing hard toward 200 bond positions, or my own mini-index fund.
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