Cedar Rapids Gazette (Newspaper) - November 14, 1974, Cedar Rapids, Iowa
The Investor’s Guide
By Sam Squishy
Q - Pitas* explain what prrcantlnas should br takrn
when one considers buying discount bonds. Also, please send me in the enclosed stamped envelope a list of corporate and tax-exempt bonds.
A — Bonds sell at a discount from par (face value) main
ly lor either one of two reasons:
1 — liOW coupon rates — 3, 4 or 5 percent, for example —
such as were put on bonds issued in the 19H0s would automatically reduce the market price today of even a top-quality bond to the level where its effective yield to maturity would approximate that of bonds now being issued.
Example: American Telephone 4:»/4s of 1992,' issued in 19WI, can’t be expected to sell at par (where the yield would be only 4»/4 percent) even though all Telephone bond issues are rated AAA, because an
investor can today buy later Telephone issues yielding 9 percent and above. So the
4%s have to sell at a discount sufficient to bring their yield to maturity into the same range with later Telephone issues.
The bond market is an employment center for funds, and no one is going to put money to work at 4‘V4 percent when 9
percent and above are obtainable with the same risk.
2 — Bonds also sell at discount — even with 9 or IO percent coupons — because the risk in owning them is deemed higher than the risk in owning better quality bonds which, with such coupons, would be selling much cloner to, or at, par.
The questions an investor should ask himslf, then, when considering the purchase of discount bonds are:
In considering a highly rated bond: “Am I willing to take a lower current return now for the sake of delaying part of my total investment reward to maturity — when that reward, in the form of price appreciation to par, will be taxable at only long-term capital gains tax rates?
In considering a low-rated bond sidling at a discount: “Am I in a financial position to assume the risk that this bond may not lie able to meet semi-annual interest payments, or redemption provisions at maturity?”
To sum up: A discount in a top-quality bond represents mainly delaying part of your reward until maturity. A discount in a low-quality bond indicates some question that the issuing corporation can carry out its commitment to the bondholder.
As to your request for lists of bonds: I have no such lists any more than I have a list of all the stocks available on the various exchanges or over the counter. I am sending you a basic fact sheet on taxable and tax-exempt bonds. But for specific bond names you will have to check quality in the standard bond manuals (at your broker or bank) and for specific prices you will have to check the daily or weekly market reports.
Q — Friends have been talking about buying banker's
acceptances. Please define them.
A — A banker's acceptance is a method af short-term
corporate borrowing. The acceptance is a draft drawn upon a bank and accepted by it. The bank then resells the acceptance to investors who put up the funds for. say, 90, 120, or ISO days. The bank charges a fee for its services and for its guaranty of the loan.
The interest rate, of course, will depend upon the current money market, the credit standing of the corporate borrower and/or the bills of lading or warehouse receipts for goods against which the loan is made. If you, as the buyer, can’t evaluate the credit rating of the borrower, then you base your judgment on the strength of the bank endorsing the acceptance.
Q — If mutual funds — such as thnsc new ones which
invest in short-term l>onds — do not charge a sales or redemption fee how do they make money?
A — The same way all “no load" funds make a living —
by charging a management fee which is a certain fractional percent of total assets.'
Q — What is the difference between treasury bills and
treasury bonds and notes0
A — Bills are bought at a discount, run only as long as a
year, and are paid off at par. The difference between what you pay and what you receive is your interest income. Treasury notes and bonds run to much longer maturities — out to the end of the century, in fact. These pay interest every six months.
Q — I recently attempted to buy stock but didn t succeed.
Too young. If I can join the army, bet on horses, and vote in national elections, why can’t I buy stock until I am 21?
A — Because, financially speaking, you are a minor until
ago 21 and, therefore, the broker wants to protect himself. However. I see no reason why you can’t buy via a custodial account with one of your parents as custodian. Just as good.
Mr. Shuls* v welcomes written Questions, but he will be able to provide an swert onlv through the column For information on retirement, ond pre retirement planning, please include a self addressed, stamped envelope Address your re auests to Sam Shuls*v, care of The Gazette
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