Bonds: The Unbeaten Path to Secure Investment Growth

Chapter 12. BOND LOOK-ALIKES

THEY LOOK LIKE bonds, and they often act like bonds, but they are not bonds. They are the financial instruments that compete with bonds and sometimes complement bond portfolios. Investors might become interested in these alternatives when they're seeking more cash flow or a different kind of cash flow to satisfy their financial needs. The spectrum of risks may be different from those associated with bonds, although that may be overlooked in the search for income.

And when investors are interested, financial firms and brokerage houses are quick to rush in with fancy-sounding products geared to those interests. Two of the many offerings go by the names of principal-protected securities (a great name in a sliding stock market) and equity-linked CDs (not so great in a sliding stock market). No matter what the name, we believe that many of these financial products are designed to appeal to investors known as "yield hogs." Typically, yield hogs consider only yield in examining investments and ignore other issues such as safety, liquidity, and tax implications.

Let's consider five classic look-alike bond alternatives and present the uses, advantages, and disadvantages of each: CDs, both direct sale and broker-sold; single-premium immediate fixed annuities and deferred fixed annuities; nonconvertible fixed-rate preferred stock; and dividend-paying common stock.

Certificates of Deposit

RATINGS

There are a number of rating systems for CDs. You may find one rating system ...