Tuesday, July 24, 2007

Bonds For Those Prepared to Take Moderate Risks

Bonds that are S&P rated at BBB and above are considered "investment grade" while below BBB they are considered "junk bonds." What this means is that the risk of default is substantially higher. In exchange for the risk, you get much better returns.

As an example of an S&P BBB rated bond, CUSIP 577778CB7, May Dept. Stores, is a bond due 7/15/2024, with a 6.65% coupon--and the current price is 88.083. This means that the yield to maturity is 7.94%. This is a "Make Whole Call" bond, so there is a possibility that it could be called (at a price of 100) before the bond matures--and that, along with the risk, is why the yield is so spectacular.

I would not encourage anyone to invest a big chunk of the portfolio in a bond like this--but if you have some very, very safe bonds that are paying 6%, putting a small portion of your bond portfolio in something like this might be a prudent way to improve the average return.

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