JZE: MORE DETAIL

JZE is one of the Trust Certificates purchased today, described in the prior blog, and it has as its underlying bond a 8% senior note from AT & T, same as JZJ, but the coupon of the TC starts at 6.75%.  For each upgrade in the rating of AT & T's debt, the coupon is reduced by 1/4%. It can not be reduced below 6% according to the prospectus which is where I believe it is now due to several upgrades in the debt rating since the issuance of this TC.  So, when I bought today, I bought the lowest coupon that the security JZE could have, which is 6%. The interest payable is calculated on the par value of $25. An easy calculation can be made when the purchase is made at 1/2 of par value with a 6% coupon. My yield becomes 12% at $12.5. If the debt is downgraded one notch, then the coupon will go to 6.25% but that 1/4% is worth 1/2% to me at a $12.5 cost. Now if the AT & T is downgraded 3 notches, then you are back to 6.75% or 13.5% to me. The calculation is simple (.06% x $25 par=$1.5 in interest paid annually for 1 share, $.75 semi-annually, and then divide that $1.5 by your cost, mine is 12.5 on JZE  and you get the 12% yield that I alluded to earlier. 

If held to maturity in 2031, then I do a quick calculation to see how that will juice my return, by amortizing the spread between cost and par value over the remaining life of the bond and I try to keep it simple by only using whole years. If AT & T survives, I have 23 years left to earn 12%, maybe more in the event of downgrades. I want to amortize on a straight line basis the $1,250 difference between my cost for 100 shares and par value of $2,500 on that 100 shares. Divide $1,250 by 23=$54.35 per year.  I want to know what that gives me per year in return so I divide that number of $54.35 by my cost of $1250= 4.35% per  year.  This would give me a total return, without considering taxes and assuming all payments are made, of 16.35% per year, more as I have said in the event of each and every downgrade which is worth a 1/2 point to me per notch.