Monday, October 13, 2008


I am continuing to add Trust Certificates to the bond side of my overall portfolio allocation. A few minutes ago I bought 100 JZV  at $12.78 for the third time this year,  with the prior purchases and sales being at much higher prices, with a net of over $400. The last sale was close to $20 in early August after having bought in mid July. The other trade was 100 sold at over 23 in April 2008. How times have changed in such a short period.   Since I am already ahead on this one by over $400, I thought that I would try again at the lowest price that I have paid for it to date.

JZV contains a senior bond from CNA Financial, an insurance company (ticker CNA) that has a 7.25 % coupon.  This TC is a Lehman ABS origination, series 2003-10.  It is possible that some individual investors believe that this is a Lehman bond. It is not. Lehman originated the trust, deposited CNA bonds into it several years ago, and the Trustee collects the interest from CNA and distributes the interest payments to the certificate holders. The Trustee files reports with the SEC on these interest disbursements.  When the bond matures in 2023, CNA pays the Trustee, a U.S. bank, and the Trustee pays the owner of the Trust Certificates.  I explain this in more detail in one of my first posts on JZJ and I assume familiarity with that post in all discussions about Trust Certificates.

JZV has a lower coupon than the underlying bonds.  It has a 7% coupon and a $25 par value. So when I just purchased 100 at 12.78, that was almost 1/2 of par value which almost juices my effective yield to twice the coupon, or close to 14% annually paid in semi-annual installments in  May and November.  Most of the TCs go ex-interest and pay fairly quickly thereafter, sometimes in as little as three days after the ex interest date. For this one the last ex date was May 12th and it would have been paid on the 15th.  So you would have had to own it on May 11th to receive the interest payment.  Of course, like stocks and mutual funds, the price is adjusted on the ex date by the amount of the payment which is about $.88 per 1 for JZV.   

My interest yield at 12.78 is 13.77% plus close to another 100% if held to maturity in 2023 and CNA pays what it owes at that time. A 15 year amortization of $1200 would be $80 per year or 6.26% annually, bringing the total return potential to about 20% annually, before taxes, and assuming as usually all interest payments are made and principal is paid at maturity in 2023.

I believe the CUSIP on the underlying bond is 126117AE0.  WHEN I HAVE THE CUSIP NUMBER OF THE UNDERLYING BOND, I WILL CHECK IT TO SEE HOW IT IS BEING PRICED IN THE BOND MARKET BEFORE BUYING THE TC CONTAINING THAT BOND.  I WANT TO KNOW IF THE TC IS BEING MIS-PRICED.  THIS IS JUST ONE OF MANY FACTORS THAT I LOOK AT.  THE UNDERLYING BOND  APPEARS TO BE THINLY TRADED WITH THE LAST MAJOR TRADE ON 10/1 AT 82 FOR THE 100 PAR VALUE, 480 UNITS AT 1000 AND I ASSUME THAT ANY READER KNOWS THAT I AM NOT TALKING ABOUT THE TC HERE BUT THE UNDERLYING BOND TRADED IN THE BOND MARKET WHERE THEY USE A 100 PAR VALUE AND TRADE IN $1000 UNITS WHERE 1 at 100 means 1 bond costing $1,000 at par value.  Some much  smaller trades, like 10  recently cleared last week at 65 and a 15 at a tad over 70.   I view those as individual trades and place no reliance on them.  I have no idea whether any trades cleared today.

In full disclosure, I own shares of JZv and will  not buy additional shares at or below the current price without first selling the shares that I just bought at a higher price.  This is not a recommendation to buy or to sell.  Trade at your own risk, and perform research about this security by reading the prospectus at and further studying the financial health of CNA FINANCIAL (symbol CNA at yahoo finance) before making any investment. Consult with your financial advisor prior to making any purchase. In this blog, I am merely describing my reasons for purchasing this security and the potential pitfalls that I identified prior to purchase.  This security may not be suitable for others based on their unique financial position and risk profile.  THE PROSPECTUS ON THIS TC CAN BE FOUND AT SEC.GOV



    This is not a comment because I'm just a newby and have a very primitive question.

    I purchased corp. bond through ameritrade. They don't even charge a fee, which has given me an idea that I may be able to purchase some bonds directly from an issuer. If I can do that, it will save me a fair amount of time. I'd appreciate if you could respond to my question.

    Thank you very much and best regards,


  2. Thanks for the question. I did not see it until I went back in my blog's history. It is better to leave the comment at the newest blog entry where I am more likely to see it. Many brokerage companies allow companies to market bonds directly to investors. Before the credit crunch kicked into high gear in 2008, I was able to buy corporate bonds so marketed in what was called a Corporate Note program at par value on the date of issuance and the broker did not charge a commission. If I place a bid directly in the bond market, I would pay a fee at my broker of $8. Since the credit crunch many of American corporations have not been able to sell bonds via direct marketing to individual investors and some of them are just starting to do it again as conditions improve. I am not familiar with the E Trade Program but it sounds similar to what is available at my broker. If you have any general questions, you can email me at the address in my profile page. I also discuss in my blog other ways to buy bonds, via purchase of Trust Certificates and Exchange Traded bonds. You may want to spend some time learning about them.