Friday, November 28, 2008

Continued Discussion on Trust Certificates & Forbes Article/DKR

I mentioned earlier that there had been no notice published of the ex interest and payment date for the semi-annual interest due from DKR, the TC containing a senior bond from Hertz due in 2012.  I suspected it went ex interest on 11/21 and this proved to be correct.  The notice was published today in the WSJ dividend section. Dividends - Markets Data Center - Payment will be made on 12/1.

My ownership of DKR highlights one of my main differences with Richard Lehmann's recommendations in his article in this week's Forbes. For me, it is extremely important to try and make money in two ways from a bond holding.  I always perform two calculations.  How much will the yield be at my cost which Lehmann does provide in the article for the three TCs that he recommends?  Then, how much will I make when the bond matures and what is the additional yield provided by the spread between cost and par value amortized over the remaining life of the bond?  I want to be able to make money in two ways, from the current yield and the spread between cost and par.  I can not do that by buying a bond maturing in 2097.  I am likely to live long enough to capture the spread of a Motorola bond maturing in 2028. So, if I was interested in a TC containing a Motorola bond, I would not choose the one recommended in the Forbes article but the one which is not mentioned that matures in 2028 that would give me a similar current yield plus the spread assuming I choose to hold it until maturity.   Article in this Week's Forbes on Trust Certificates/Trust the Government?  I would not have a bought a very risky bond- the underlying Hertz bond contained in DKR -unless I could make money in two ways.  I would not take the risk for just the current yield.  Moreover, I would not buy a long term bond issued by Hertz.  I bought the Hertz TC only because it matures in June 2012 and it was selling at close to a 75% discount to par value. This TC is discussed in several posts but the most detailed discussion is in these posts.TRUST CERTIFICATE HERTZ BOND DKRHERTZ BONDS Most of my potential return on this one originates from the spread, a staggering 73% annualized return to June 2012, caused by the short maturity and the deep discount.  While the coupon yield at my cost is certainly enticing, at about 25% a year, I would not venture into buying this TC just for that return given the risk.  I also limited my potential downside by buying only a small amount-100 shares.  Even though this is small, I survive only by treating $700 the same way that I would $70,000.  This means that I am constantly monitoring Hertz's earnings and financial condition to ascertain whether I should try to hold until 2012.  So, this analyst has many moving parts.  Initially, however, I would rule out any bond maturing after 2038 just on the maturity date alone with no other consideration entering into the analysis.  Thus, I jettisoned the idea of buying the TC with the Motorola bond in 2097 (XFH) as soon as I saw the maturity date but I still monitor the other one maturing in 2028 as almost bought it recently (XFJ).   

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