Independent, Fee-Only Financial Advisor

Independent, Fee-Only Financial Advisor

Tuesday, February 28, 2012

any value in bonds?

There is always an argument between bonds and stocks. Plain vanilla bonds offer known returns in terms of capital gain or loss and a regular coupon payment. So long as the company stays in existence, you get exactly what you expect. Stocks, however, offer the chance to participate in the totally unknown future earnings of the company, or not, depending on how the market decides to act.

There are practical reasons to own bonds - namely, income. Unfortunately, right now, interest rates are terribly low, so there is very little income to be had from owning bonds. Dividend paying stocks offer income as well, but again, it is not contractually obligated income like bonds.

If a company can't pay interest on its bonds, it can go bankrupt. This is a bad thing. Bond owners and prospective owners need to assess the company's ability to pay interest. Ratings agencies watch this sort of thing and issue ratings based on the perceived ability to pay.

Recently, the ratings agency S&P put the bonds of United Technologies on a negative outlook - essentially saying they were worried that UTX may not have the same ability to pay their interest that they once did. One might think, that even in this low interest rate environment, people might shy away from this sort of thing. I checked.

As it turns out, you can get 17 year bonds issued by UTX for $1.45 on the dollar. Thats right, you are guaranteed to lose $0.45 for each overpriced bond you buy. (Cusip 913017BA6, if you are interested) What is the value in that?