GMAC smartnotes

[Ronstar]

My MIL called all nervous about her $25k investment in GMAC smartnotes. She says they're paying 7.05%, but her broker called to tell her that the value has declined to $9,500. She asked for my opinion. I know very little about bonds. I've searched this board and Google and find conflicting advice. Some say stick with them because there is very little chance of GM going bk. Others say dump them. Any ideas?

[MasterBlaster]

Bonds go up and down in value based on the bond interest rate, prevailing interest rates and the credit worthyness of the entity. When there is a chance that bond holders may not get their money back then the bonds go down in value. Should GM reverse it's unfavorable business situation then the bonds will go up in value.

GM's credit rating has gone into deeper into junk status..

From a reuters article on August 17th - Moody's cut GM's corporate family rating one notch to "Caa1," seven steps below investment grade. The outlook is negative, indicating an additional downgrade may be likely over the coming 12 to 18 months.

[mtmozart]

You might be interested in this link
Make A Bet on General Motors - Forbes.com
in which the GMAC smartnotes do not get high points.

Mtmozart

[haha]

Quote:

Originally Posted by mtmozart You might be interested in this link Make A Bet on General Motors - Forbes.com in which the GMAC smartnotes do not get high points. Mtmozart

They may still be a poor choice, I don't know- but a lot might have changed in the 2 years since that article was written.

Ha

[jazz4cash]

GMAC is only half owned by GM these days. I think it's a 49/51 % split with Cerebus Capitol.

The Forbes artical is two yrs old, written while the spin-off is was in-process. The age may not make much difference to the comments in the artical esp. regarding liquidity, but if I had a reasonable asset allocation I would stick with the Smart Note unless it was keeping me up at night. I have a GMAC Demand Note account. Its like a non-insured money market account. It pays 4.88-5% apr, it's run by Mellon Bank and I am very comfortable using it as a conduit for 3-6 mos expenses.

[copyright1997reloaded]

Quote:

Originally Posted by Ronstar My MIL called all nervous about her $25k investment in GMAC smartnotes.

Number 1 question: What percentage of her net worth is in this investment? If the answer is greater than 4 or 5%, she should be nervous regardless of the investment (with the possible exception of short term Treasury instruments or FDIC/NCUA insured deposits).

[cute fuzzy bunny]

I cant say that thats particularly good advice, since we have no idea how old the MIL is, what her asset allocation is, or what her objectives and time horizon are.

I dont think smartnotes are very smart right now, but saying that she should be nervous if she isnt in treasuries and insured deposits? Cant see how anyone would draw that conclusion.

[Freein05]

Unfortunately I just got paid off on my smartnotes. They matured. The interest rate on them was little over 7% and I had bought them at a discount a couple of years ago so the overall return was better than the 7%. They paid interest monthly which was nice.

I would not be afraid to hold more of them.

As far as bond ratings go they are not worth anything. I have a Lehman bond that was worth 88 cents on the dollar last month and it is worth 5 cents today if I could find a buyer.

[cute fuzzy bunny]

Hugo Chavez might be interested.

[youbet]

Quote:

Originally Posted by Freein05 I have a Lehman bond that was worth 88 cents on the dollar last month and it is worth 5 cents today if I could find a buyer.

I got a report through Schwab you may be interested in.

Quote:

One firm (CreditSights) estimated on September 16 that senior, unsecured debt of Lehman Brothers may receive 50 cents on the dollar now that the firm has entered Chapter 11 proceedings. Note that this is an estimate of what the bondholders may eventually receive. The bonds may trade at substantially different values and, as of September 17, were trading much lower in the 20-to-25 cent range.

http://www.schwab.com/public/schwab/...s_and_you.html

[copyright1997reloaded]

Quote:

Originally Posted by cute fuzzy bunny I cant say that thats particularly good advice, since we have no idea how old the MIL is, what her asset allocation is, or what her objectives and time horizon are. I dont think smartnotes are very smart right now, but saying that she should be nervous if she isnt in treasuries and insured deposits? Cant see how anyone would draw that conclusion.

My qualifier was if it was greater than 4 or 5% of her net worth, which I would stand by (in general, there are always exceptions) for any non risk-free single company investment, especially for people who aren't aware of the risk factors. (And by risk free, I mean risk free in terms of principal loss, not other factors.) This is amplified by the OP's statement:

Quote:

My MIL called all nervous about her $25k investment in GMAC smartnotes. She says they're paying 7.05%, but her broker called to tell her that the value has declined to $9,500.

which implies she is already hyper about a (relatively) minor principal loss, which also implies that her risk tolerance isn't very high. But you are correct, we don't know how old she is, current asset allocation, net worth, risk tolerance, objectives, etc, and so my assumption, well as the saying goes....

Sigh. This is why I don't do this for a living, and in general don't give friends financial advise. Handling my money is one thing, and if something goes wrong I have only one person to blame.

[cute fuzzy bunny]

I was confused then. I read your post to say that any investment over 4-5% that wasnt in short term treasuries or fdic deposits should make someone 'nervous'.

Most of my money is not in short term treasuries or fdic deposits. I'm not particularly nervous.

[Ronstar]

My MIL is 80. I dont know her net worth, but I'd say that she has around 5-10% of it in Smartnotes. Her risk tolerance is very low, and her investment objective is to maximize income from investments. She sees her rent and expenses going up and her return on investments going down, and she listens to the doom from her friends, and she panics.

I told her yesterday that if I had smartnotes getting 7.05% on 25k, but now worth only $9500, I'd leave it alone. She somewhat agreed. I believe these types of investments (tied to GM or other gov't favored entity) are safer now under the bailout plan.