- The Washington Times - Wednesday, June 1, 2005

Q I’m retired and hold a number of corporate bonds in my IRA. Their maturity dates are staggered in a ladder, and I hold them to maturity, using the interest generated as retirement income. The recent bond-rating downgrade to junk status of General Motors Corp. and Ford Motor Co. by Standard & Poor’s has me concerned. I have some holdings of bonds in both companies, and they do not mature until 2011. I realize that I do not know how this might impact me. I know that the coupon interest paid will not change, and although the market price of these bonds will go down, that is not important as long as I hold the bonds to maturity. I know that you cannot predict the likelihood of either of these companies actually declaring bankruptcy, but what is the likely scenario if one of them should? Would interest payments be disrupted? Would the bond face value be maintained to maturity?

A: Your questions and concerns highlight one of the major reasons that I have long advocated that when investors desire to invest in corporate bonds, they do so through a diversified, professionally managed bond mutual fund. When you buy individual bonds, you not only should be doing lots of upfront analysis of the companies and bonds, but you also should be doing ongoing analysis. I doubt that you have the expertise to do it as well as a fund-management team does.

When a company falls into bankruptcy, there is a range of possible scenarios. In the worst possible case for you, such a company would fail to make further interest payments and the bond would become worthless. In the best possible scenario, few if any interest payments would be missed, and you would receive the full principal amount back at maturity.

If you’re going to continue to invest a portion of your portfolio in corporate bonds, I strongly suggest that you use an efficiently managed bond mutual fund. At the Vanguard Group, for example, you can choose among many funds with annual management fees running less than 0.2 percent. That works out to less than $20 per year per $10,000 invested — a small price to pay for professional management.

• E-mail Mr. Tyson at: [email protected]erictyson.com.


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