Microsoft Bonds Offer 3.5%+ Yields

| About: Microsoft Corporation (MSFT)

Shares of famed American software giant Microsoft (NASDAQ:MSFT) have crept up to $30 levels today (Wednesday) after opening near $26 in January of this year, and reaching a YTD high in the mid-$32 range in March-April. The firm has been in the news recently in the context of new retail stores to rival Apple's (NASDAQ:AAPL) famous Apple Stores, the new Windows 8 operating system, talk of acquisition of struggling phone maker Nokia (NYSE:NOK), and patent cross-licensing with rival Apple against competitors Samsung (OTC:SSNLF), Google (NASDAQ:GOOG), and Amazon (NASDAQ:AMZN), among other stories.

Several fixed-income issues from the firm, however, offer some attractive corporate bond yields for potential investors. For investors wary of the risks in MSFT equities or equities in general, take a look at a few of MSFT's corporate bonds that offer yields greater than 3.5% today; I've excluded any bonds with explicitly apparent special redemption provisions:

  1. Microsoft Corp CUSIP 594918AD6

These industrial bonds are non-callable, taxable, dated May 18, 2009, and mature on June 1, 2039. Coupon rate is 5.2%, with semi-annual payments in months June and December. First coupon was paid on December 1, 2009. The bonds' current yield is 4.048%, with a yield to maturity of 3.549%. Quantity on the market in this highest-yielding lot of 250, with minimum purchase quantity 10. These bonds are currently priced at 128.468 cents on the dollar. For an individual investor looking to purchase the minimum quantity here, principal and accrued interest would come to a total cost of $12,960.92.

Moody's analysts have given these Microsoft bonds a long-term rating of AAA, conveying a judgment of "investment grade" on the bonds, which are deemed to be of the highest quality with minimal credit risk. In explaining their rationale for this high rating, analysts cite:

Management's very conservative financial philosophy, including the maintenance of very strong liquidity ($52 billion of cash and investments as of December 2011) and low financial leverage (0.5x debt to EBITDA), is an important consideration in the AAA rating. With its substantial financial flexibility, the company is well positioned to address general challenges related to technology evolution and substitution as well as its exposure to litigation risk. Longer-term challenges include the growth of tablet-style devices currently based on non-Microsoft software, search based advertising and potential incursions that could be made into its operating system and productivity software market position over time.

For investors looking for attractive Microsoft fixed-income issues, I would recommend purchase of the above lot. In fact, in case this first lot is bought up quickly, the next seven highest-yielding MSFT bond lots on the market are of the same issue, with at least 1,000 more of these bonds available for purchase. As the yields on these lots differ (3.549% on the high end to below 3.5% on the low end), there's some opportunity for an arbitrage trade here if one is so inclined.

Below is the next highest-yielding bond (from Microsoft) with different characteristics that may be worth secondary investigation in case liquidity, investment characteristics, or personal preference prevents investment in the above issue:

  1. Microsoft Corp CUSIP 594918AJ3

These bonds are non-callable, taxable, dated September 27, 2010, and mature on October 1, 2040. They carry the same AAA rating from Moody's as well as a coupon rate of 4.5% with semi-annual payments in April and October. First coupon was paid on April 1, 2011. Thirty four of these bonds are being offered in the highest-yielding lot, with a minimum purchase quantity of 34. These 34 bonds are each priced at 117.310 cents on the dollar, translating to a current yield of 3.836% and a YTM of 3.524%. To purchase these 34 bonds, principal and accrued interest payments would come to a total cost of $40,476.15.

Investors should be sure and investigate all the factors involved to see if this investment and its risk characteristics are appropriate for their investment strategy and objectives before entering into a purchase of these bonds. Still, for certain investors, the prospect of 3.5%+ yields in relatively safe corporate fixed-income issues will justifiably appeal.

Be careful when examining corporate fixed-income securities to see if any bonds in question have special redemption provisions that might result in a lower yield to worse than anticipated.

Fixed-income investors should conduct their own due diligence on all potential investments before making final investment decisions. Investors should remember that these notes are not bank deposits and are not insured by the Federal Deposit Insurance Corporation or any other governmental agency, and that the integrity of the notes is based upon Microsoft's credit solvency and ability to service its debts to bondholders and creditors into the future. Best of luck!

Disclosure: I am long AAPL.

Additional disclosure: I may initiate a short put options position in MSFT, AMZN, and/or GOOG within the next 72 hours.

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