Where would you put $15,000 now?

[laurence]

So DW and I were going over the finances ( a favorite pastime - no really, we're sick like that ), and we realised we are starting to build up quite a bit of cash reserve in our savings account. We discussed it and decided we'd be willing to move $15 grand of it out and into "something", but we aren't sure what. Now we have an Emigrant Direct account, we could just throw it in there and get 4.5%, but we'd like to see if we can get more juice than that. I'm open to anything somewhat safe, and at least somewhat liquid (can get to it in a year or less). 10 year notes are 5%, so maybe this is wishful thinking. Where do y'all stick your near-line cash (as in on-line, near-line, off line data storage, computer metaphor)?

[justin]

I keep mine in Vanguard Admiral Treasury Money Market. 4.43% return. State tax free. That pushes my effective yield up to about 4.76% with a 7% state tax rate.

$50,000 minimum initial purchase, so don't know if you can swing that.

VG prime money market is paying 4.51%. $3000 min.

VG Federal MM is paying 4.45%, about 30% state tax free.

[2B]

Two choices --

1. Wire transfer to my bank account. I will give you half of my share of 25% of a now deceased Iraqi general's estate that served under SH who now has no heirs. I'll share my good fortune with you.

2. Put it into your asset allocation. Use this as a mid-year rebalance. It won't pay out as well as Option 1 but it has less risk.

[brewer12345]

Laurence, I recently bought a good chunk of some exchange-traded notes issued by Sallie Mae (symbol ISM). Trades like a stock, pays a monthly coupon based on CPI plus 2.05%. They are currently trading at a discount to par, so they yield about 3.35% over CPI. I think they are safe, offer very attractive yield, and are pretty liquid.

[laurence]

Wow, I'm looking into that ASAP! Thanks, Brewer!

[brewer12345]

Yeah, yeah, but as always do your own due diligence.

[haha]

Originally Posted by brewer12345

Laurence, I recently bought a good chunk of some exchange-traded notes issued by Sallie Mae (symbol ISM).* Trades like a stock, pays a monthly coupon based on CPI plus 2.05%.* They are currently trading at a discount to par, so they yield about 3.35% over CPI.* I think they are safe, offer very attractive yield, and are pretty liquid.

Brewer,

I find OSM, CUSIP 784429 40 3, described as Medium Term Floating Rate Notes Due 2017. When bought at par, or $25, they pay a monthly dividend that equals an annual rate of 12 month CPI change +2.00%. When bought at less than par, the interest characteristics get very interesting!

When I look up ISM, I find "6.398% Senior Notes Series A". The Sallie Mae website sucks, and I can't find the cusip of this issue to get more information. Also, the debt doesn't seem to be broken out in the 10K.

Could you give more info? (Including Cusip?)It looks to me so far with limited info that this ISM could some other animal than a CPI adjusted note.

Incidentally, if these are going to be carried inside a tax deferred account, it looks to me like plain old TIPs are paying better at present, though the way the BPs over CPI increase with increasing CPI when this OSM is bought below par make it interesting should CPI inflation become greater than at present, or if the market price should deteriorate further. Also, monthly interest can't go below 0%, thus you can't get a negative increment as you might with a TIP in the event of deflation. Which seems to me unlikely to be an important factor anyway.

Any comments?

Ha

[preben]

Closed end funds have their own special risks - the discount/premium point being one of them. I still find Brewers ETF interesting though. Does not compare mto a MM account of course but we are all aware of that.

Personally I would do what 2B suggest - use it for some mid year re-balancing of the base portfolio.

Cheers!

[NinjaPigeon]

Originally Posted by brewer12345

Laurence, I recently bought a good chunk of some exchange-traded notes issued by Sallie Mae (symbol ISM). Trades like a stock, pays a monthly coupon based on CPI plus 2.05%. They are currently trading at a discount to par, so they yield about 3.35% over CPI. I think they are safe, offer very attractive yield, and are pretty liquid.

Sorry for the dumb question, but can you explain that a little more in English? What is an exchange-traded note? What is a monthly coupon? What is par?

Originally Posted by HaHa

Brewer,
When I look up ISM, I find "6.398% Senior Notes Series A". The Sallie Mae website sucks, and I can't find the cusip of this issue to get more information. Also, the debt doesn't seem to be broken out in the 10K.

What is cusip?

[brewer12345]

I sent this link to Laurence last night, but I guess I should have posted it here for more general consumption: http://www.quantumonline.com/search....SM&sopt=symbol

The link is to the Quantum Online profile for this security. Quantum, incidentally, is a great resource for doing research on income investments, although I think they will make you register (bugmenot.com if you don't want to register). Look specifically at the "link to prospectus" on the description page, which pulls up the prospectus on Edgar (I don't know how else you would ever find it).

OK, some translations to English:

- "exchange traded note" means that this is a bond that is listed on and traded on an exchange just like a stock. So you can buy or sell it for the standard brokerage commission and avoid delaer markup and all the other BS that goes with most bonds. It is a bond, not a preferred stock or some other thing low in the capital structure.
- Monthly coupon is the monthly CPI plus 2.05%. Since the bond is trading well below par, the YTM is significantly higher (over 3% at Friday's price).
- Par is $25. So at ~22.50, this bond is trading at 90 cents on the dollar.

I will give give you guys the CUSIP on Monday when I have access to my Bloomberg.

Fair warning: I own this thing and it does not have a lot of daily volume, so if you all pile in on Monday, you will bid it up and I will benefit. This is NOT my intention, since I intend to hold and I post this info purely for your own edification. Don't chase it over 23 to make sure you get a good deal.

As always, do your own due diligence.

[laurence]

Thanks again, Brewer, this is exactly the type of investment I was looking for. 3% over CPI and good liquidity. Of course, if they go belly up it's all your fault.

[SC]

Brewer, thanks for the link to Quantum Online. I was wondering where in the world one would find more information about exchange traded notes.

As an educational exercise, I was comparing ISM with OSM, where OSM is a similar note with a 2% spread (instead of 2.05%). Both "are expected to trade flat, which means accrued interest will be reflected in the trading price." My understanding is that this means the previous interest payments should be reflected in the share price; in other words, that for ISM to be trading at par it would need to be at $25 + the interest payments from February, March, and April 15. This is consistent with OSM having a higher price (23.65 at last trade), since it's been around three quarters more. Does that seem correct?

Unfortunately it doesn't appear that there's an easy way to get historical interest payments on these notes, and since this is just an exercise for me I bailed out on looking up historical CPI's and calculating the past interest payments in order to judge which of these was the better deal...

Very interesting, though! Thanks to you I now know something new.

BTW, the link you provided shows ISM with a CUSIP of 78442P601.

SC

[brewer12345]

Originally Posted by sc

Brewer, thanks for the link to Quantum Online.* I was wondering where in the world one would find more information about exchange traded notes.

As an educational exercise, I was comparing ISM with OSM, where OSM is a similar note with a 2% spread (instead of 2.05%).* Both "are expected to trade flat, which means accrued interest will be reflected in the trading price."* My understanding is that this means the previous interest payments should be reflected in the share price; in other words, that for ISM to be trading at par it would need to be at $25 + the interest payments from February, March, and April 15.* This is consistent with OSM having a higher price (23.65 at last trade), since it's been around three quarters more.* Does that seem correct?

Not quite. What the verbiage meant was that ISM (like all exchange-traded bonds) trades at whatever price it trades, regardless of accrued interest. So if you see a price quoted ($22.50), that is the sum total of what you will pay per share even though there might be 5 or 10 cents of accrued interest. This is in contrast to the rest of the bond market where you usualy agree on a price for the bond and then you also pay whatever accrued interest comes with the bond.

Since ISM and OSM both pay monthly coupons, the amount of accrued is usually small. The price differential between ISM and OSM appears to be an anomaly because they both carry about the same amount of accrued interest.

Historical payouts for OSM:

11-Apr-06 $ 0.115 Dividend
10-Mar-06 $ 0.105 Dividend
10-Feb-06 $ 0.135 Dividend
11-Jan-06 $ 0.172 Dividend
12-Dec-05 $ 0.116 Dividend
9-Nov-05 $ 0.11 Dividend
12-Oct-05 $ 0.093 Dividend
12-Sep-05 $ 0.102 Dividend
10-Aug-05 $ 0.117 Dividend
12-Jul-05 $ 0.106 Dividend
10-Jun-05 $ 0.106 Dividend
11-May-05 $ 0.102 Dividend

[SC]

Thanks for the clarification, I certainly misread that one. Very interesting.

SC

[saluki9]

I guess I'm either too simplistic or too conservative

I'd rather just buy a 10yr TIPS, collect my 2.3-4%, not worry at all about credit quality or liquidity, marketability, etc.

[brewer12345]

Originally Posted by saluki9

I guess I'm either too simplistic or too conservative*

I'd rather just buy a 10yr TIPS, collect my 2.3-4%, not worry at all about credit quality or liquidity, marketability, etc.

I think ISM is closer to an I-bond. More yield and liquidity, but a smidge of credit risk and no tax deferral. Probably best held in an IRA.

[markr33]

Originally Posted by sc

Brewer, thanks for the link to Quantum Online. I was wondering where in the world one would find more information about exchange traded notes.

As an educational exercise, I was comparing ISM with OSM, where OSM is a similar note with a 2% spread (instead of 2.05%). Both "are expected to trade flat, which means accrued interest will be reflected in the trading price." My understanding is that this means the previous interest payments should be reflected in the share price; in other words, that for ISM to be trading at par it would need to be at $25 + the interest payments from February, March, and April 15. This is consistent with OSM having a higher price (23.65 at last trade), since it's been around three quarters more. Does that seem correct?

Unfortunately it doesn't appear that there's an easy way to get historical interest payments on these notes, and since this is just an exercise for me I bailed out on looking up historical CPI's and calculating the past interest payments in order to judge which of these was the better deal...

Very interesting, though! Thanks to you I now know something new.

BTW, the link you provided shows ISM with a CUSIP of 78442P601.

SC

You can see the "dividend" (really interest) history here -

http://finance.yahoo.com/q/hp?s=ISM

What they mean by "reflected in the share price" is that if you purchase the bond 10 days into the interest earning period, you still receive the full months interest payment and do not have to pay the seller 10 days of interest (as you would with a regular bond).

This bond pays interest monthly on the 15'th of the month or the next business day thereafter. The next interest payment (for holders of record 5/10/06) is on 5/15/2006 and is $0.124/share (bond).