I have not talked about the TC containing a senior bond from Prudential (PRU). This TC (JZH) has a $25 par value and a 6% coupon. The underlying securities have a smaller coupon at 5.75%. I just bought 50 at $9.75 which gives me an effective yield of 15.38% based on my cost. The underlying bond matures on 7/15/2033 with interest payable in January and July. Fitch has it rated an A. This is a pretty steep discount for an investment grade bond. I believe that the CUSIP for the underlying bond in this TC is 74432QAC9. The bond has not had any significant trades recently that I could find. The prospectus can be found at the SEC under LEHMAN ABS. http://www.sec.gov/Archives/edgar/data/829281/000090514803004314/efc3-1848_form424b2.txt I am already familiar with this company since I own a short term note maturing in 2012 but it is a small one so I felt comfortable adding a position in a Pru long bond at a tempting interest rate.
In addition to the coupon which gives e 15.38% annualized, I would receive the difference between $25 and $9.75 in 25 years and a quick calculation is that would add 6.25% per year bringing a potential total return to over 20% annualized for 25 years. That calculation needs to be checked. (if I bought 100 at 9.75, that would mean a profit of $1525 at maturity divided by 25=$61 per year amortized divided by cost of 975= 6.25%). So I think that I am right about that total return figure which of course assumes all interest payments are made and the payment of par value at maturity. The reason for the fall in price of this TC has to do with the market's perception of life insurance companies which is currently extremely negative.
I am not a financial advisor but an individual investor trying to navigate my way through a difficult market. In these posts, I am acting as an unpaid financial journalist and an occasional ornery political commentator. I am also aggregating financial news stories that I view as important and providing any reader of these posts, assuming there are more than a couple, with links to those articles, sort of a filtered, somewhat intelligent, free search engine. Any discussion made by me of particular securities is not a recommendation to buy or to sell. Trade at your own risk. Consult with your financial advisor prior to making any purchase or sale. I will try to identify my sales too but it may take a few minutes after I implement them to create a post explaining my reasons. The sale may before or after the post. Before buying or selling any stock, even one recommended by a trusted financial advisor, please research it and make up your own mind which is what I always try to do. Research would include reading reports, reviewing financial records, earnings estimates, sec filings and prior earnings releases and news. In this post, and all others by me, I am merely describing my reasons for purchasing or selling securities, and the potential pitfalls that I identified prior to purchase or the reasons for a sale. The securities mentioned in this and all posts written by me may not be suitable for others based on their unique financial position and risk profile. Always read the prospectus before buying a Trust Certificate, bond, preferred stock or other bond or bond like investments.