The Hunt for Safe High-Yield Investments
The problem for many of us in the current zero interest rate environment is squeezing sufficient yield out of our investments to meet our needs and/or wants – without taking on risk that is outside our comfort zone. For those in their 70’s and 80’s who have a nest egg that they can reasonably expect to bequeath at least some of, the problem takes on an added dimension. Because even a bequest consisting of relatively safe, higher-quality bonds can be worth significantly less to an heir than the original investment, depending upon the interest rates available at the time of receipt of the bequest.
A recent Wall St. Journal article made me aware of a type of offering that, although probably not a good fit for many of us, has the potential to meet the needs of some older investors.
Investment Grade Bond With An Insurance Like Feature
The offering featured in the article is small denomination ($1,000 per unit) investment grade corporate bonds with an insurance-like feature. In the event of the death of the original investor, the inheritor of the bonds has the option, but not the obligation, to ‘put’ the bond to the issuer at the price the original investor paid.
How It Works
For example, imagine Sophie, a spry 89 year-old, buys $100,000 of these ten-year, survivor-option bonds paying 5.0% in 2012. And assume by 2015, Sophie’s spryness has passed on and so does she, unfortunately at a time when inflation rates are higher and so are interest rates. That means that Sophie’s $100,000 bequest to her nephew Claude might be worth something like $80,000 on the open market. Of course, Claude could hold the bonds seven more years until maturity and eventually get his $100,000, still collecting the $5,000 interest each year along the way. But it’s possible that Claude might need the funds more immediately, maybe to handle the wrap-up of Sophie’s affairs or to pay his own taxes, or maybe Claude just wants to maximize the amount of money available for him to fritter away.
The Survivor-Option Benefit
Regardless of the heir’s circumstances and regardless of the then-prevailing interest rate and market value of the bonds, since he’s the named survivor he has the option to receive the full value of the original investment.
Right For You?
As I mentioned, the vehicle is essentially an investment-grade corporate bond with an insurance kicker. And as with all kickers, there’s a cost and those fees are estimated to be around 0.125%, about an eighth of a point, per year which comes out of the regular interest payments made.
As I said, these bonds aren’t for everyone, certainly not for younger investors. And, as with all investments, there are pro’s and con’s and costs and risks with these offerings. But I can see where they could fit the needs of certain older
