In today's world of ultra-low interest rates, it has become quite difficult to find bonds of adequate credit quality with acceptable yields. On top of that, finding such a bond that is also trading at a discount to par is becoming the type of thing legends are made of. This is especially true in the mid-to-upper region of the investment grade corporate bond market. What this means is that investors who want to build or add to a portfolio of individual bonds will need to be comfortable purchasing bonds that are trading at a premium to par.
Just because an individual bond is trading above the price at which it will one day be redeemed does not mean investors should automatically avoid it. There are likely suitable bonds both in terms of credit quality and yield trading at premiums to par simply because they were issued with very high coupons. Investors focused solely on bonds trading at discounts to their face value might end up missing a whole host of decent fixed income offerings. With this in mind, I would like to share the details of several bonds trading over par that investors might find of interest. They range in maturities from four-and-a-half years to thirty years and have yields of 4.529% to 7.175%.
Furthermore, four of the five bonds have at least one non-investment grade rating. Given this, even investors who find the credit quality, duration, and yield of one of these bonds worthwhile should keep in mind that credit spreads will likely fluctuate significantly at some point between now and maturity. If you think there may be a better entry point in the future but also find today's price acceptable, consider scaling into a position over time.
Ford Motor Company's (F) senior unsecured note (CUSIP: 345370BN9) maturing 11/15/2025 has a 7.125% coupon and is asking 113.93 cents on the dollar (5.609% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody's currently rates the note Baa3; S&P rates it BB+.
Cooper Tire & Rubber Co.'s (CTB) senior unsecured note (CUSIP: 216831AB3) maturing 3/15/2027 has a 7.625% coupon and is asking 104 cents on the dollar (7.175% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody's currently rates the note B2; S&P rates it BB-.
Royal Caribbean Cruises' (RCL) senior unsecured note (CUSIP: 780153AJ1) maturing 3/15/2018 has a 7.25% coupon and is asking 113 cents on the dollar (4.529% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody's currently rates the note Ba1; S&P rates it BB.
J.C. Penney Company's (JCP) senior unsecured note (CUSIP: 708160BQ8) maturing 4/1/2017 has a 7.95% coupon and is asking 104 cents on the dollar (6.899% yield-to-maturity before commissions). It is non-callable and pays interest semi-annually. Moody's currently rates the note Ba3; S&P rates it B+.
Vale S.A.'s (VALE) senior unsecured note (CUSIP: 91912EAA3) maturing 9/11/2042 has a 5.625% coupon and is asking 101.998 cents on the dollar (5.488% yield-to-maturity before commissions). It has a make whole call and pays interest semi-annually. Moody's currently rates the note Baa2; S&P rates it A-.
While investors should not overlook bonds trading at premiums to par when building a fixed income portfolio in an ultra-low-rate world, there are additional considerations to keep in mind before pulling the trigger. In my article, "3 Things To Consider When Buying Premium Bonds," I outlined three important pieces of information of which investors should be aware before purchasing bonds trading above their face values. Here is a brief summary of those three points:
1. Although you may pay a premium to the bond's face value, the coupon on the bond will be higher than the yield-to-maturity. Over time, the excess amount you will receive in coupon payments over the current going rate in the market will offset the premium you paid on the bond.
2. Pay close attention to call provisions. Especially when paying a premium for a bond, carefully weigh the possibility of its being called from you before maturity.
3. If you are planning on purchasing bonds trading over par, take a look at the "Bond Premium Amortization" section of IRS Publication 550. It will be of assistance come tax time.
Please be aware that prices in the over-the-counter U.S. bond market may vary depending on the broker you use. I discuss this in my article, "Are You Paying Too Much For Your Bonds?" The current prices may also differ greatly from those listed at the time this article was written. For more information on any of these notes, including additional call or put features, please contact your broker or read the indenture.
Also, please do your own due diligence on the financial profiles of the companies mentioned in this article. Only you can determine if taking the counterparty risk of purchasing individual bonds is suitable for you.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.I am long CUSIPs 216831AB3 and 91912EAA3.