Added 10/18/2011: I am no longer updating this post. Instead, I have written a new post on this topic: Trust Certificates: New Gateway Post (Post Dated 9/23/11)
Another frequent topic of discussion in this blog is a unique way to own a bond, and to purchase them on a stock exchange rather than in the bond market. I call them Trust Certificates, sometimes abbreviated to just TCs. A Trust Certificate represents an undivided interest in the property of a trust that contains a bond from a single issuer, that bond is referred to as the underlying security of the Trust. The trustee collects the interest payments from the issuer and then disburses those funds to the owners of the Trust Certificates. Most Trust Certificates have a par value of $25 which makes them more affordable for an individual investor who may not want to buy a bond in the minimum unit of $1,000.
I give a general discussion of Trust Certificates in this post. Trust Certificate JZJ AT & T BOND It would also be helpful for anyone unfamiliar with this form of ownership to read a prospectus just to become acquainted with this type of security, before even trying to make a selection.
I currently own a large number of these securities. During the 4th quarter of 2008, they became seriously mispriced compared to the prices of the underlying security. On top of that, the underlying securities were frequently being seriously mispriced in the bond market in my opinion, particularly in October 2008, so it was like a discount to a discount in my view. Back then it was not unusual to pick up 3, 4 or even 5% more by buying the bond in Trust Certificate form than by buying the bond directly in the bond market, and corporate bonds were then trading at historically high premiums to comparable U.S. Treasuries. I have discussed some of the reasons behind this dysfunctional pricing which is less of an issue now. The prices for the individual bonds contained as the underlying securities in the Trust Certificates can be found at the FINRA web site, and I have started to collect links to the pertinent bonds in the following Gateway Post. LINKS TO FINRA INFORMATION ON UNDERLYING BONDS IN TRUST CERTIFICATES
THESE SECURITIES ARE GROUPED TOGETHER AT THE QUANTUMONLINE SITE UNDER THIRD PARTY TRUST SECURITIES. Third Party Trust Preferred Securities Table - QuantumOnline.com
AGAIN, I RECOMMEND BECOMING A MEMBER OF THIS FREE SITE.
In these posts I discuss many that I currently own and some of my trading activity in them:
AT & T: (AUGUST 2010-JZE AND GJF CALLED & JZJ PARTIALLY CALLED BY OWNER OF THEIR RESPECTIVE CALL WARRANTs)
FINRA Info Underlying Bond In JZJ FINRA
JZJ UNDERLYING BOND PROSPECTUS: www.sec.gov
GYC Prospectus: www.sec.gov
FINRA INFORMATION UNDERLYING BOND GYC FINRA
UNDERLYING BOND PROSPECTUS GYC Final Prospectus Supplement
AON
FINRA INFO ON UNDERLYING BOND: FINRA - Investor Information - Market Data - Bonds - Bond Detail
KVW Prospectus: 424B5
KVF Prospectus: 424B5
DUKE (NOW SPECTRA ENERGY)
CNA FINANCIAL
HERTZ
MACY'S
VERIZON (XFL CALLED 3/24/2010 by Call Warrant owner)
PRUDENTIAL
BOUGHT 50 JZH AT 21 (POST FROM MAY 2010)
Sold 50 JZH at 24.45 (bought total cost 14.81 in 9/2008)
Underlying Bond Prospectus: Prospectus Supplement
VALERO
GOODYEAR TIRE:
FIRST AMERICAN:
J P MORGAN
GOLDMAN SACHS:
Item # 2: Bought 50 of the TC JBK at $16
Item # 4: JBK
DKW PROSPECTUS www.sec.gov (2033 SENIOR BOND)
PROCTOR & GAMBLE:
Prospectus for Underlying Bond in the TC: Final Prospectus Supplement
ALLSTATE:
DOMINION RESOURCES:
UNDERLYING BOND PROSPECTUS: FORM 424B5
CREDIT SUISSE
FIRST UNION (ACQUIRED BY WELLS FARGO)
BANK OF AMERICA:
Countrywide (now Part of Bank of America)
EMBARQ: (ACQUIRED by CTL)
TC PROSPECTUS: www.sec.gov
UNDERLYING BOND PROSPECTUS: Form 424(b)(4)
FINRA INFO UNDERLYING BOND: FINRA - Investor Information - Market Data - Bonds - Bond Detail
WAL- MART:
DPL
AFC CAPITAL (guaranteed by Hanover Insurance)
LIBERTY MEDIA
Daimler AG:
Unum:
TIME WARNER:
FINRA Info Underlying Bond: FINRA - Investor Information - Market Data - Bonds - Bond Detail
IPB: A TC CONTAINING 15 CORPORATE BONDS AND TREASURY STRIPS
Limited Brands:
Burlington Northern Santa Fe: (DELISTED after Berkshire acquisition)
Qwest:
FINRA Information Underlying Bond: FINRA - Investor Information - Market Data - Bonds - Bond Detail
Goodrich:
Sprint:
FINRA Information Underlying Bond for DKI: FINRA (2032 Sprint Capital)
Underlying Bond Prospectus for Sprint Capital 2032: www.sec.gov
DHM Prospectus: Prospectus Supplement
DKI Prospectus: www.sec.gov
R R Donnelley
FINRA Underlying Bond Info: FINRA - Investor Information - Market Data - Bonds - Bond Detail
XEROX
FINRA Underlying Bond Info: FINRA - Investor Information - Market Data - Bonds - Bond Detail
MOTOROLA
FINRA INFO UNDERLYING BOND XFJ: FINRA
XFJ PROSPECTUS: www.sec.gov
UNDERLYING BOND PROSPECTUS: /www.sec.gov
GENERAL DISCUSSIONS:
It is important to understand how the call warrants contained in the prospectuses will impact the price of the TC and its redemption, when the underlying bond in the TC is selling at a premium to its par value.
The Trust Certificates can only be understood by reading the prospectuses and doing your homework. In these posts, I explained how I decide to buy one, and the various factors that enter into the decision making process. Some Certificates contain senior bonds, others have junior bonds, some are floaters, some of the underlying bonds are rated junk and others are investment grade with some higher quality names like AT & T and Verizon. Each one has to be considered on its own merits.
I may leave some that I currently own out, but I believe my current positions are JZE, JZJ, JZH, JZV, DKR, DKQ, KTN, KVW, DKK, PJL, XFL, PJS, KTV, MJH, KCC, XKK, DKF, PIS, PKK AND PROBABLY MORE INCLUDING THE SYNTHETIC FLOATERS WHICH ARE ALSO IN TC OWNERSHIP FORM. Links to Discussions on Floaters in One Post
I am an opportunistic buyer of these securities, so most of them are currently priced at levels that have little or no interest to me. Many are currently classified as long term holds as part of my bond allocation.
THIS IS ALSO A FRUITFUL AREA FOR A TRADING STRATEGY CALLED FUNCTIONAL EQUIVALENCE, UNTIL I STARTED TALKING ABOUT THAT TRADE.
I WILL JUST ADD TO THIS POST WHEN I FIND ADDITIONAL RELEVANT LINKS TO ITS SUBJECT MATTER.
These are links to what I view as important information about these investments, risk management in bonds, inflation and credit risks and bonds in general:
More on Investing Process and Blackjack/Large Risks & Opportunities In the Savaged REIT Securities/ AA, GE
See Disclaimer
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