GMAC Smartnotes

[retire@40]

What a great rate and mighty tempting to put some small change into a bond like this.

Too bad the risk is so high, but I guess that's why they are offered at such a high rate. I have noticed rates are s...l...o...w...l...y creeping up.

Does anyone know how long these Smartnotes have been around and if any of them have ever defaulted?

CUSIP: 3704A0XR8

Coupon: 7.250%
Maturity: 3/15/25
Callable: 3/15/10
Yield: 7.360%
Moody Rating: Baa1
S & P Rating: BBB-

I heard a guy call in on Public Radio the other day, that was in the auto parts business. He said the rumors were rampant in the industry that GM would declare Bankruptcy before this year end. The caller went on to explain that the ramifications of this were huge in the U.S. economy; as he said that 70% of all U.S. Manufacturers were connected to the Auto Industry!

So how's that for doom and gloom?

[brewer12345]

Smartnotes are just like any other bond: look to the credit of the specific issuer. In the case of GM, run!

Well, I must weigh in. I am loaded with Smartnotes
and can tell you none has defaulted. Of course they could default even without Cut-Throat's nightmare scenario, which I do not expect but will allow is not outside of the realm of possibility. OTOH, I believe that I read where GMAC had their biggest profit ever in 2004
(forget the numbers). I was wondering the exact
relationship between GM and GMAC. If GM did file
for chapter 11 protection (an event which I view as a
million to one shot) perhaps GMAC could just continue on without a ripple. I am not sure and not interested
enough to check. In the meantime, I am staying the course with GMAC.

JG

[retire@40]

And the rates keep rising!!!

GMAC SmartNotes

CUSIP: 3704A0YW6

Coupon: 8.400%
Maturity: 4/15/10
Callable: NO
Yield: 8.488%
Moody Rating: Baa1
S & P Rating: BBB-

[cute fuzzy bunny]

Pretty junky junk.

You want to see about 6% over 'safe haven' money to want to take on that amount of risk.

At 8.4%, they're offering a little better than 3% over intermediate treasuries and 5 year CD's.

Not enough.

Good luck John, I'll say a prayer for ya.

[retire@40]

Quote:

You want to see about 6% over 'safe haven' money to want to take on that amount of risk. At 8.4%, they're offering a little better than 3% over intermediate treasuries and 5 year CD's. Not enough.

Where do you get the 6% over rule? Are you saying it would make more sense to invest in that bond if the yield were 11 or 12 percent? If so, wouldn't the default risk be even higher at that rate making it even more risky?

[MRGALT2U]

I am not too sure about this one. But, if I wasn't so heavy already I would buy the 8.4% 5 year notes.
Even today.

JG

[charlie]

JG, you shun market risk yet welcome credit risk.
To each his own, I guess. :

Cheers,

Charlie

[cute fuzzy bunny]

Quote:

Where do you get the 6% over rule? Are you saying it would make more sense to invest in that bond if the yield were 11 or 12 percent? If so, wouldn't the default risk be even higher at that rate making it even more risky?

One of those "old time" rules. I think Bernstein mentioned it a couple of times in his books and its why he recommends short term bonds as the only bond holding. We havent had that 6% cushion for "high yield" bonds in a long time.

The historical 'spread' between zero/low risk bonds and these near junk offerings needs to be high enough to absorb the prospect of default. 3% (a ~50% higher rate than a safe instrument) doesnt cut it.

I saw something on one of the vanguard forums that said the vanguard high yield bond fund was seeing 25% default rates on their fund...and theirs holds a lot of nearly investment grade stuff...its one of the 'least junky' high yield funds. Is the 6% yield thats paying worth the risk of 1% over a 5 year CD? Ick.

Is 3% worth a default of your capital? Uh uh...