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BofA recently called their zero coupon bonds due 07/17/28 [CUSIP: 638 58R FD8]. Now that the trade is closed, I can talk about its details.

In all, I held four positions, bought on the following dates, at the following prices, and with the following achieved yields:

Qty Traded Entry Exit Profit/Year
9000 02/02/08 $2,222 $2,993 7.8%
5000 07/13/09 $743 $1,663 41.1%
5000 07/08/10 $1,399 $1,663 9.3%
7000 02/02/11 $2,105 $2,328 7.3%

Retrospectively, I’d like to say these were obvious and worry-free trades. But that would be far from the truth. There is no reason that it couldn’t have been BofA that went under instead of (or in addition to) Bear Sterns and Lehmans. All of the banksters were screwing around with toxic assets in total disregard to financial prudence, and to have bought any of their bonds was to share in their folly.

OTOH, given that the Fed wasn’t going to let the whole bank system fail, selected and representative positions in the industry had to be taken if one wanted to call oneself a value investor. So I bet on some of Bof A’s zeros as a way to gain industry exposure without committing a lot of capital. This time, the bet paid off. Next time, it probably won’t and, instead, I’ll simply short the issuer.

Also, if you’ll look at the trade dates and quantities, you’ll notice that averaging down the summer of ’09 is what really saved my butt. But that’s a highly-speculative, highly-disadvised move to make when prices have moved against you. This time, I got away with it. But it isn’t a move I should have done, just as I shouldn’t have put on such a big position as I did initially.

So, yeah, the trade turned out to be profitable. But it really does deserve a grade of “D” for how it was set up and executed. The market, in its kindness, forgave me my mistakes this time. That’s all that happened.
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