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Frequently Asked Questions
Corporate Bonds

These are questions from real investors phoned in to my past TV show, live. I’ve included them here in the same phrasing used by callers, which is not always the “correct” phrasing(!) But I thought that many other investors who are not bond professionals may be able to relate to the callers’ way of talking.

Some of my answers are quite long and informative. Others are short, to the point, “zesty zingers!” Sorry. No one ever accused me of being too tactful!

Question:
Please comment on corporate bond ratings, and how low would you go before you would stop buying for a conservative investor?

Answer:
What’s a conservative investor? Probably if you asked Donald Trump if he was a conservative investor, he would say “yes.” If you asked Michael Milkin if he was a conservative investor, he would say “yes.” What is a conservative investor? The rating agencies, Moody’s and Standard & Poor’s have a rating scale that is divided between Investment-Grade bonds and High-Yield bonds. See Alister’s Investment Notes: “Bond Ratings” for a chart of those ratings.

In general, anything that is rated BBB or above by S&P is considered to be investment grade. Anything that is rated BB or below by S&P is considered to be high yield. Riskiness is in the eye of the beholder. The courts have defined what it considers investment grade or not. Basically, a fiduciary is considered to be acting responsibly on behalf of his or her beneficiaries if bonds that are BBB or higher are purchased.

How low I would go in ratings before I would stop buying for a “conservative” investor would be entirely decided by that investor’s risk tolerance and personality characteristics. No two investors would describe “conservative” the same.

Question:
What is your opinion of convertible bonds, and where would you buy them?

Answer:
I don’t do very many convertible bonds for my clients, so I really shouldn’t speak about them. I will say that for those people who want to take a position in a stock that may grow in the future but who are not willing to give up some investment earnings while they’re waiting for that growth, a convertible bond may be just the ticket. There are brokers that specialize in convertible bonds, and anyone interested in making these purchases ought to confer with one of those who specialize in it.

Question:
Do you consider AAA-rated corporate bonds as a safe investment for a 401(k)?

Answer:
Absolutely, positively, I do! I think that BBB rated and higher bonds are an acceptable investment for a 401(k) vehicle. But, I’m talking about individual bonds, not bond funds, which I dislike in any portfolio.

Question:
I tried to buy corporate bonds, and I got a bid-and-ask spread of 104 to 108. That seemed wide to me. Is that normal?

Answer:
It might be normal for a bond that isn’t very actively traded. There may not be a big market to bid up the bid price. Many people see bids and offers in the newspaper. Listed bonds in the newspaper represent a very, very small percentage of the number of corporate bonds that are actually for sale at any moment in the “over the counter” (brokerage house to brokerage house and investment bank to investment bank). Also, in the paper you don’t see a bid-and-offer that is necessarily timely. It is simply the bid-and-offer of the last bidder and last offerer! So, the large spread as exhibited by this question can be due to any number of reasons.

Question:
Do all bonds have calls on them?

Answer:
No, all bonds do not have calls on them. Those without calls are called “Non-Callable Bonds.” Remember, once the call date has been reached, the bond is callable anytime thereafter. When purchasing a bond that has a call ten years or sooner, it should be a practice of the selling firm that they indicate to you the call and also the yield to call.

Question:
What is “event risk”?

Answer:
Event risk is a risk of a downgrading in your bond as a result of bankruptcy or merger or takeover or some unforeseen event. Sometimes event risk can work for you. In the case of Long Island Lighting Company, which had been facing financial problems, the State of New York moved in and became its partner, resulting in the bond being upgraded strongly. Other times, such as the case of the famous lawsuit between Occidental Petroleum and Texaco Corp., there can be a judicial ruling that results in a sudden downgrade and the value of your bond will fall. Be advised, it’s important to watch how much money you have invested in a stock and a bond of the same corporation. The “Prudent Man Rules” suggest that not more than 5% of your assets be invested in any one credit. That is to say, your stock and bonds combined of the same company should not be more than 5% of your investment portfolio.

If your portfolio is greater than $500,000, Sharon Alister can provide a free analytic review to help ensure that your portfolio is in line with your investment goals. Call Sharon Alister at (800) 745-7110 or email info@AlisterTalksBonds.com

 

Interest Rates (Indications only)

Please note the rates for Ins’d and Pre-Res are not available from Bloomberg and will be updated as soon as possible.

Treasuries AAA Munis
3mo 1.815 N/A
6mo 2.009 N/A
1yr 2.237 1.74
2yr 2.482 1.87
5yr 2.809 2.19
10yr 2.970 2.53
30yr 3.145 3.14
today's rates chart

AAA Rated Munis

Pre-Res Ins’d Pure*
2 yr 1.91 2.05 1.87
5 yr 2.23 2.49 2.19
10 yr N/A 2.89 2.53
15 yr N/A 3.20 2.82
30 yr N/A 3.50 3.14

*Rated AAA on its own
Source: Bloomberg

Frequently Asked Questions
Corporate Bonds

These are questions from real investors phoned in to my past TV show, live. I’ve included them here in the same phrasing used by callers, which is not always the “correct” phrasing(!) But I thought that many other investors who are not bond professionals may be able to relate to the callers’ way of talking.

Some of my answers are quite long and informative. Others are short, to the point, “zesty zingers!” Sorry. No one ever accused me of being too tactful!

Question:
Please comment on corporate bond ratings, and how low would you go before you would stop buying for a conservative investor?

Answer:
What’s a conservative investor? Probably if you asked Donald Trump if he was a conservative investor, he would say “yes.” If you asked Michael Milkin if he was a conservative investor, he would say “yes.” What is a conservative investor? The rating agencies, Moody’s and Standard & Poor’s have a rating scale that is divided between Investment-Grade bonds and High-Yield bonds. See Alister’s Investment Notes: “Bond Ratings” for a chart of those ratings.

In general, anything that is rated BBB or above by S&P is considered to be investment grade. Anything that is rated BB or below by S&P is considered to be high yield. Riskiness is in the eye of the beholder. The courts have defined what it considers investment grade or not. Basically, a fiduciary is considered to be acting responsibly on behalf of his or her beneficiaries if bonds that are BBB or higher are purchased.

How low I would go in ratings before I would stop buying for a “conservative” investor would be entirely decided by that investor’s risk tolerance and personality characteristics. No two investors would describe “conservative” the same.

Question:
What is your opinion of convertible bonds, and where would you buy them?

Answer:
I don’t do very many convertible bonds for my clients, so I really shouldn’t speak about them. I will say that for those people who want to take a position in a stock that may grow in the future but who are not willing to give up some investment earnings while they’re waiting for that growth, a convertible bond may be just the ticket. There are brokers that specialize in convertible bonds, and anyone interested in making these purchases ought to confer with one of those who specialize in it.

Question:
Do you consider AAA-rated corporate bonds as a safe investment for a 401(k)?

Answer:
Absolutely, positively, I do! I think that BBB rated and higher bonds are an acceptable investment for a 401(k) vehicle. But, I’m talking about individual bonds, not bond funds, which I dislike in any portfolio.

Question:
I tried to buy corporate bonds, and I got a bid-and-ask spread of 104 to 108. That seemed wide to me. Is that normal?

Answer:
It might be normal for a bond that isn’t very actively traded. There may not be a big market to bid up the bid price. Many people see bids and offers in the newspaper. Listed bonds in the newspaper represent a very, very small percentage of the number of corporate bonds that are actually for sale at any moment in the “over the counter” (brokerage house to brokerage house and investment bank to investment bank). Also, in the paper you don’t see a bid-and-offer that is necessarily timely. It is simply the bid-and-offer of the last bidder and last offerer! So, the large spread as exhibited by this question can be due to any number of reasons.

Question:
Do all bonds have calls on them?

Answer:
No, all bonds do not have calls on them. Those without calls are called “Non-Callable Bonds.” Remember, once the call date has been reached, the bond is callable anytime thereafter. When purchasing a bond that has a call ten years or sooner, it should be a practice of the selling firm that they indicate to you the call and also the yield to call.

Question:
What is “event risk”?

Answer:
Event risk is a risk of a downgrading in your bond as a result of bankruptcy or merger or takeover or some unforeseen event. Sometimes event risk can work for you. In the case of Long Island Lighting Company, which had been facing financial problems, the State of New York moved in and became its partner, resulting in the bond being upgraded strongly. Other times, such as the case of the famous lawsuit between Occidental Petroleum and Texaco Corp., there can be a judicial ruling that results in a sudden downgrade and the value of your bond will fall. Be advised, it’s important to watch how much money you have invested in a stock and a bond of the same corporation. The “Prudent Man Rules” suggest that not more than 5% of your assets be invested in any one credit. That is to say, your stock and bonds combined of the same company should not be more than 5% of your investment portfolio.

If your portfolio is greater than $500,000, Sharon Alister can provide a free analytic review to help ensure that your portfolio is in line with your investment goals. Call Sharon Alister at (800) 745-7110 or email info@AlisterTalksBonds.com

 

Interest Rates (Indications only)

Please note the rates for Ins’d and Pre-Res are not available from Bloomberg and will be updated as soon as possible.

Treasuries AAA Munis
3mo 1.815 N/A
6mo 2.009 N/A
1yr 2.237 1.74
2yr 2.482 1.87
5yr 2.809 2.19
10yr 2.970 2.53
30yr 3.145 3.14
today's rates chart

AAA Rated Munis

Pre-Res Ins’d Pure*
2 yr 1.91 2.05 1.87
5 yr 2.23 2.49 2.19
10 yr N/A 2.89 2.53
15 yr N/A 3.20 2.82
30 yr N/A 3.50 3.14

*Rated AAA on its own
Source: Bloomberg

Investing involves risk, including possible loss of principal. When investing in bonds, it is important to note that as interest rates rise, bond prices will fall. Conversely, as interest rates fall, bond prices will rise.

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