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Guido
05-19-2008, 12:47 AM
Oh well, the excuse got me in here----

I feel some of you retired Turks have been around the block far enough and I need answers. Of the professionals I've asked, no one is willing to sign his name and the answer is always: 'Well, the triple AAA is just a safer buy'.

Q: Concerning the financial bonds which can be bought through any broker, why would one buy a ten year, AAA Moody's rated bond, from say General Electric or Anheuser Busch with a coupon of 3 1/2 % per annum, non callable, YTM of 3 1/2 % ----when--- one could buy an A rated bond from either of the above companys with a 6 1/2 % coupon, YTM of 6 1/2 %, non callable, ten year maturity.

How real is the risk? What am I missing? This is not 'blood' money being investing, plans are to let it ride.

Thoughts? and thanks----

G

PM me if so desired---------

J Tiers
05-19-2008, 08:25 AM
For no-brainer purposes, don't bother with less than AAA rated. So says my wife, who is an actuary, and also spent 10 years doing work for a fee-only financial planner.

You actually can't assess the risk adequately unless you do lots of research, but that is the reason for the rating to start with. Defaulting on bonds is associated with tougher financial times, like now.

If you want to play around with the somewhat riskier stuff, OK, but it is best not to do it with essential funds.

Getting a municipal bond can be better, as it simplifies the tax issues. Then also the discount rate affects what you get also.

Just watch out, because there are what look like regular bonds still floating around which are actually re-re-packaged mortgage securities. They almost certainly will be A or at most AA bonds, and will probably offer a suspiciously large discount.

Frank Ford
05-19-2008, 10:25 AM
Guido -

There might well be a good reason professionals aren't willing to commit.

If you want an entertaining and informative look at the financial mess we're in, check out "The Giant Pool of Money" on "This American Life."

http://www.thislife.org/Radio_Episode.aspx?sched=1242

Me, I don't like to gamble, because there's always the possibility of losing. . .

Mcgyver
05-19-2008, 10:55 AM
Guido,

You're not going to find bonds from the same entity with two different ratings from the same agency. In other words, there aren't GE capital moody rates A's and moody rated AAA's. A bond is an unsecured debt and the ratings agency's giving an opinion as to the issuers' ability to repay; therefor all bonds from the same issuer have the same rating - because its unsecured you can't strata it into different security classes or ratings. If you're seeing a large difference in yields for bonds from the same issuer, they have different terms left in them.

The other complication is that there are a couple of rating agencies, and they don't all use the same lettering scheme...they all have triple A, but Moody's A2 is S&P's A for example (yes i had to look up that last part).

what do i know compared to Moody's, but imo its BS that a private company gets a AAA rating. And the market thinks so to - GE's trade at a higher yield than treasuries. You'd think that if these agencies gave the same rating to two issuers, they're saying each is just safe, each has an equal ability to repay. The market says BS and discounts the GE's more than treasuries. Fundamentally, governments with an ability to tax will always be safer than a company.

Guido
05-19-2008, 09:42 PM
Mcguyver--------No surprises on this end, but if the S & P/Moody's boys simply listed all those companies having AAA ratings, etc, by name, things would be a little simpler but more open to questions as to just who is getting under table handouts. What you've said is, the rating is of the company and not the particular bond they are selling.

I've come to rate the stock market as about one step below a legal bunko game.

Six years ago we bought a AAA Caterpillar bond, paying 7.2 %, but recently called at face value. With your comments, we found that all Cat's bonds listed today, are rated only A. Wondering out loud, just how much loss of quality is Cat suffering, for such a loss in favorable rating. I dunno--

Thanks for everyone's input. I'll probably spend my IRS return in LV.

G