No. of Recommendations: 2
Caveats: The following is not a recommendation to buy. I was poking around in the corporate zeros, trying to see what the action was, and Coca Cola’s 0’s of ’20 caught my attention.

Currently, there is a lot of 232 offered (10/1) at 62.54 for a broker’s calculated YTM of 4.5%. Compared with the other corporate-zeros currently offered, the bond seemed to be worth a further look, whereupon I discovered that there are three issuers that have to be dealt with, a bottom-rated bottler, a lower-tier Coke “Enterprises”, and the higher-rated Coca Cola Co. The zero is offered by Coca Cola Enterprises, and it carries a rating of A3/A, which isn’t too bad.

The first thing to look at when considering any issuer’s bonds is all of its offerings, not just the bond of interest, and to plot a yield-curve. If you’re a Defensive Investor in Ben Graham’s sense of the term, and if the yield curve looks the least bit “unnormal”, you immediately back away. What is “unnormal”? Excessive “flattening” and, for sure, inversions. But Coke’s YC is normal. So that worry can be set aside.

The next thing to look for is any “sweet spots” or “sour spots”. Generally, the data points of a yield-curve cluster fairly tightly and describe decelerating curve. (The rate of increase gradually decreases. Doc Tar will know the proper math term for such a curve, but the name escapes me just now.) The sweet and sour spots are the data points that fall above or below trendline of the curve. To buy a sweet spot is to pick up a bit more yield that that offered by bonds of comparable maturity. To buy a sour spot is to give up a bit of yield compared with bonds of comparable maturity. Sometimes, often times, a sweet spot is created for one of two reasons. The desk holding the bonds wants to blow them out, so they are discounting them, or the large size of the minimum purchase is such that a discount is granted to the purchaser.

E.g., right now, by eye, there is an obvious sweet spot in Coke’s yield-curve created by the price asked for their 8.5’s of 2/12 compared to their 3.75’s of 3/12. The former offers a half point more yield than the latter and it matures earlier. But a lot more analysis would have to be done with the numbers to determine the trade-offs being made by buying one bond versus the other. And in either case, the YTM isn’t attractive. The 5.125’s of ’13 is another sweet spot, as is the zero ‘s of ’20.

In part, the fact that the zero offers a bit more yield than bonds of comparable maturity isn’t surprising. Zeros generally offer a slight premium just because regular interest payments aren’t being made. So the question to ask is whether the implied premium offers sufficient compensation for the implied risks?

I would never buy this buy in a taxable account. Paying the taxes each year on the implied interest would be an all but intolerable aggravation. But in a tax-sheltered account, the bond might make sense, especially if the minimum purchase were 5 (or less) instead of 10. But for the sake of practice, let’s accept the 10-min requirement and run some numbers. The all-in purchase price would be $627.40 per bond. The holding period would be 10.56 years. The YTM using conventional YTM methods (implied annual yield divided by purchase price) would be 5.62%. CAGR would be 4.5%, which isn’t unattractive. Basically, to buy the bond would be to attempt to move purchasing power forward to the future rather than to appreciate capital. That’s an acceptable strategy with a portion of the portfolio for a Defensive Investor.

But as I said, I don’t like the fact of a 10-min purchase. Also, T&S should be looked at. Right now, the bond isn’t trading at the best of prices compared with where other trades have happened. E.g., as recently as mid-summer, some trades were happening in the low ‘50s. There’s no assurance a retail investor could have bought at that price. But that price would have created an attractive yield.

Suggestion: Like Wal-Mart, like MacDonalds, like a lot of other major American companies, Coke has a global presence. When its common or debt can be bought at attractive prices, it should be bought. Currently, the bonds are not on sale. But the zero of ’20 is exactly the sort of bond that should be put in one’s watchlist and tracked on the off-chance that a future buying opportunity might occur.
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