Tuesday, December 16, 2008

Buys of a First Mortgage Bond EMO and a JPM TC PYV

Some people do not think of me as a busy person.  I can however juggle more than a few chores at once.  After returning to HQ near the close today, I first read what the Fed did today and saw that the Federal funds target had been lowered to a range of 0.00 to  0.25%. Apparently, the intent is too keep it at extremely low levels for some time.  

My first reaction was to buy a long bond and an intermediate one which is what I did shortly before the close. The long bond is a First Mortgage bond issued by Entergy Mississippi, covering most of its assets in Mississippi. The symbol is EMO. I discussed it briefly in a prior post when I decided to pass on it and instead buy 100 of a First Mortgage bond issued by Entergy Louisiana (EHL). Notable News 10 22 2008 & END OF DAY TRADES (IR, INTC, TE AND EHL)  The coupon on EMO is 7.2%. SEC 

Interest is paid quarterly and it went ex interest a few days ago.  EHL goes ex interest in a couple of weeks or so.  My discussion about the dangers of long bonds, made in connection with Trust Certificates, is equally applicable to these First Mortgage bonds: Trust Certificates: Issues with Long Term Corporate Bonds, except the first mortgage bond is obviously more senior debt than any underlying bond contained in a TC.  

A first mortgage would, generally, be the most senior debt issued by a corporation (along with debt secured by UCC filings on such non- real property items like receivables or office equipment). Sometimes the federal government may achieve a senior lien such as when it files a tax lien recorded before the filing of a mortgage lien-among others examples beyond the scope of this discussion.

The other position was an intermediate bond contained in a TC that I have not discussed. I bought a J P Morgan  junior debt issue contained as the underlying bond in the TC PYV at 18.5.  It may have just gone ex interest and it pays quarterly.  Maturity is on March 15, 2014 so it is close to a five year bond which is going to be classified by me as an intermediate bond.  The main appeal to me is capturing the spread of $6.5 per share in a little over 5 years which I calculate to be worth about $122 per year for each 100 shares for 5.3 years or 6.6% per year at my cost which looks good now in the current interest rate environment provided J P Morgan survives to pay me the par value in March 2014 which is $25. SEC 

This security is a floater. The  minimum rate will likely be the applicable rate for most of the remaining term and the minimum rate is 3.25% which I can live with in this low interest rate environment.  The rate is almost 5% based on my cost.  So the total return would be close to 12% annually -held to maturity with the par value paid in full on 3/15/2014.  The float rate is 83% of the 10 year Treasury Note.  So the minimum guarantee is the rate now and for the foreseeable future.  

 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 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.  Information contained in my posts has been obtained from sources believed to be reliable but cannot be guaranteed.  These posts by me do not constitute investment advice, nor shall they be construed as a guarantee of future results, or as an offer of any transaction in securities.   

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