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For years around here I've been a stubborn old advocate of "Own bonds, not bond funds". What happened to me this weekend helps reinforce this point of view. Since the decision of what to do with the fixed income part of your portfolio involves this decision, I'll share.
Bonds mature. Bond funds don't.

About 15 years ago I bought some bonds issued by Hilton Hotels, paying a coupon of 7.5% and to mature in 2017. The bonds are non-callable. For the 15 years they have faithfully paid that 7.5% coupon, every six montth, and have justified their spot in my IRA. Their price has fluctuated some from the 95 where I bought the bonds, had been running in the 107-110 range, dropped when Paris Hilton went to jail, down to about par. Price supplied a week or so ago by my broker was 104.

In Saturday's mail comes this package, looking rather like a prospectus. Tender offer? I take it out to study.
It seems Hilton Hotels is doing a merger with another chain. Or perhaps it is more a leveraged buyout. To clear their debt for the merger, Hilton Hotels wants to buy back their debt. It is non-callable, so they offer incentive. The $1000 per bond due at maturity plus a calculated time-adjusted figure for interest payments that will be due to maturity, plus of course all interest up to the date of purchase. Works out to about a price of 119!

I'll take it. Then go looking for another bond to replace this one.

This is the 2nd or 3rd time something like this has happened. Effectively for the $5000 in Hilton bonds I own, nearly an extra $1000 dropped in my lap!

A mutual fund owns so many different issues that even if this happened, it is so diluted as to have little effect.
This is the flip side of a bond going belly up and being a disaster in one's portfolio.

Not so easy will be the job of finding another bond to replace the lost cash flow. However, with nearly $6000 instead of $5000, I don't need a 7.5% coupon. 6.2% would do. A 10-year bond paying 6.2% would be of rather low quality, alas, but since at the end of 10 years I'll now have $6000 instead of $5000, somewhat lower would be acceptable. Looking at lists of bond offerings, it seems indeed a corporate of decent quality to replace the tendered bonds won't be too hard to come by.

This morning I called my broker and instructed her to accept the tender offer.

Sometimes unexpected nice things happen!

Best wishes, Chris
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