What are “Payment On Demand” Certificates?

By Travis Johnson, Stock Gumshoe, June 11, 2009

“This is the only buy-and-hold strategy that REALLY WORKS. If you’ve lost money in the stock market, and want a safe way to rebuild your portfolio, then these “payment-on-demand” certificates might be exactly what you need.”

That’s the promise behind the latest offer from The Bond Trader … which will tell you, even if you don’t go on to read the whole thing, that they’re talking about, well, bonds. They persist in using the silly name “Payment on Demand Certificate” to make it sound like something confusing that you couldn’t possibly handle, but, as in the past from this service, they’re selling you the idea of investing in corporate bonds.

This isn’t the only bond trading newsletter out there, but it’s certainly a smaller universe than the stock newsletters — this one comes from Steve McDonald and the Investors Daily Edge folks, the other bond newsletter that gets marketed fairly heavily is the True Income service from Stansberry & Associates (haven’t seen that one advertised very heavily lately, though subscribers say it had an awful year last year). True Income focuses more on “junk bonds” with very high yields, The Bond Trader says it stays away from junk bonds … though as we’ll see, that doesn’t mean they don’t go fairly low on the credit scale in the search for high yields.

I won’t copy over much else from this teaser, since it’s quite similar to the last two ads that I looked at from Steve McDonald — if you want a little more info about this stuff, you can see my article about some similar offerings when they were calling these kinds of bonds “TD Circ 570s,” or more recently the Rabbi’s Secret article from when Steve delved into Healthcare REITs.

I’ll just get straight to the actual investments — apparently there’s a special report, as there always is, and McDonald has three bonds we should look at. Here’s how he teases them:

“A leasing company with a scheduled return of 62.6% return payable on March 25, 2013”

That’s International Lease Finance, CUSIP 45974VB72 (should you be interested in researching or trading this bond, the CUSIP is the identifying number you would use — sort of like a ticker for a stock).

This bond last traded for $82.50 (off a $100 principal), and the current coupon is just under 6.5% a year (computed from the principal of $100, not from the current secondary market price of $82), for a yield to maturity of a bit over 12% a year, so the total (potential) return of 62% is close to being accurate. The return from a bond is equal to the coupon payments you get (the interest), plus the repayment of principal at the end — bonds that are trading for less than the principal amount allow for a possible nice capital gain at the end, since your $82 loan would be repaid by $100 in principal at the maturity date … assuming, of course, that the company is healthy enough to pay you back and doesn’t need to file for bankruptcy, or negotiate different terms with bondholders to avoid bankruptcy.

The information about the bond from FINRA (the financial regulator — they have a good bond data search website) is here, and the company’s filings are available here (they’re not publicly traded, but they have a lot of public debt, so they file with the SEC). This is an aircraft leasing company, and the bond is rated Baa2 by Moody’s, which is the lowest investment grade before you slip into “junk” territory.

“A Diversified commercial financing company with a scheduled return of 66.91% payable on August 15, 2014”

I’m not at all sure about this one, but if you’re generous with the description “commercial financing company” this could possibly be Duke Realty — CUSIP 26441YAH0. The basic information from FINRA on that one is here. Duke is a commercial real estate partnership. The other basic information fits reasonably well, the current yield is a bit over 10% and it last traded at about $80 (again, for a principal of $100).

It could also conceivably be HSBC, LaSalle Funding, or even Bank of America or CIT — there are a fair number of banking/finance related bonds maturing on that date with high yields.

And finally …

“A large student loan company with a scheduled return of 101.12% payable on June 15, 2014”

This is, not surprisingly, a Sallie Mae loan — specifically, it looks like CUSIP 78490FBY4. The info from FINRA is here. And as you might expect with a 100% potential gain like this, the rating is quite low — Moody’s actually has them down in the first tier of junk bonds, though S&P has them as barely investment grade, so you can come down on that wherever you like. The last price was in the high-$60s, with a coupon of 5.15% and an effective yield to maturity of better than 14% a year. If you think those student loan dollars will keep pouring in and Sallie Mae will be a survivor (there’s some debate about that, of course), then perhaps this will be a nice money-maker for you.

So what do you think? Interested in picking up some corporate bonds and gaining some predictable income? Do you believe these three companies are good bets as a creditor? Should individual investors be buying corporate bonds, or would we be better off letting fund managers select and trade them for us? Let us know if you’ve got the answers with a comment below.


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19 Comments on "What are “Payment On Demand” Certificates?"

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Richard
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Richard
June 11, 2009 11:08 am
Good article… Often times, investors do not have a clear understanding of the risks associated with the purhcase of a corporate bond. I have heard many financial advisors compare the coupon rate of the corporate bond to the rate one would receive from a five year certificate of deposit. Comparing Corporate Bonds to Five Year CDs is clearly not a fair and/or accurate comparison. They are two different investment vehicles and should not be used for comparison purposes. I believe more emphasis should be placed on the downside risk exposure of possibly not receiving the full face value of the… Read more »
Craig Hanscome
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Craig Hanscome
June 11, 2009 4:35 pm

Are these the same thing that Stansbury is calling (today) protected certificates?

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Seems like the too good to be true must be on this.

Ed Myers
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Ed Myers
June 11, 2009 7:06 pm

I just got an email from Stansberry about “Protected Certificates”. This sounds like a new name they have picked for junk corporate bonds?

Doug DePrenger
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June 11, 2009 7:35 pm

Thanks, Travis. I’ve never heard bonds called payment on demand certificates. I figured with large returns there is risk involved. The newsletter makes it sound like AAA rated; nary a word about risk.

Justin
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Justin
June 12, 2009 9:38 am

Ask one of the Tribune bond holders about risk.

They paid a regularly scheduled interest payment and then filed bankruptcy when the next maturity came due 2 weeks later.

And their most valuable assets (the Cubs), weren’t part of the filing, so there is no telling when the bankruptcy court will get around to issuing some kind of payment to the bondholders.

macksmart
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macksmart
June 12, 2009 5:05 pm

I attempted to buy these bond issues, but they were only available in lots of 10. Too rich for my blood. I don’t like to put more than 5% of my portfolio into any one offering, be it stocks or bonds.

Tony Lo
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Tony Lo
June 14, 2009 9:51 am

These guys are all a greedy bunch of bastards. They try to sell the same old ideas, (bonds)as if they’re a brand new idea that they just discovered. They make up some exotic new name and blow as much hot smoke up your a$# as they can to GET YOU TO BUY! It’s really quite disgusting…

Strong Eagle
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June 15, 2009 9:39 am

Hmmm… International Lease Finance is the largest aircraft lessor by value with more than 900 aircraft purchased. It is now owned by AIG.

It would seem to me that the viability of these bonds is dependent upon two things: How many aircraft deliveries are deferred and how much the company’s financing costs will rise as part of the AIG bailout.

gary
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gary
June 18, 2009 10:56 pm

Steve Sjuggerud in his Daily Wealth mentions 40% annually in Brazilian bonds. I assume Brazilian gov’t bonds. Any idea what it is, & how to find it?

wm parkinson
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wm parkinson
June 29, 2009 11:32 am
i have been using mcdonald’s bond trader since september, 08 having bought 30 of his recommended bonds to-date. i have also sold 6 of the bonds realizing annualized returns from 7% to 123% (roi’s 3% to 34%). the most major drawback to buying these corporate bonds is that i must buy a minimum of 10 bonds through my online broker. since mcdonald gives the specific cusip, you are able to order just the actual bond he recommends at or near his suggested price. there have been a few instances where i was unable to get the bond due to price… Read more »
Glenn
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Glenn
August 28, 2012 1:18 pm

any investment that promises greater than a 7% return is a crapshoot! go to Vegas and play craps and bet on 7 on the next roll after 7 consecutive no 7 rolls….for more pie in the sky investments call me. you won’t need $10K to start like McDonald requires.

Gravity Switch
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June 11, 2009 9:42 pm
Yep — “Protected Certificates”, “Secured Investment Contracts”, “Minimum Notes,” “Surety Income Certificates” … they’ve got a good thesaurus over at S&A and have been using similar pitches with different names for this service over the past year or so. I’ve written about this under many of those names, but the marketing seemed to quiet down for this service for a while, I think this is the first time I’ve seen those ads pop up in a few months. Generally Mike Williams, the editor of True Income, seems to go for the junk bonds as opposed to these “low investment grade”… Read more »
Gravity Switch
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June 11, 2009 9:49 pm
Indeed — and bondholders, though they are certainly on stronger footing than stockholders, can face more varied risk than it might seem, since it’s not always just a black and white “you get your money back at maturity” deal. In distress situations you have to get in line with the institutional bondholders who hold most of the debt and accept whatever deal they agree to, which might be settling for far less than par value. In extreme cases, you get something like GM or Chrysler where there’s a government finger on the scale, too, but even in more ordinary cases… Read more »
macksmart
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macksmart
June 12, 2009 5:06 pm

I got lucky and sold my Tribune bond before the BK.

macksmart
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macksmart
June 12, 2009 5:10 pm

Most of the bonds I’ve bought that they recommended have been BBB or better. No junk there, at least not to me.

Gravity Switch
Admin
11
June 18, 2009 8:59 am
From Mike Williams? Interesting, most of the ones I’ve seen teased have been junk bonds, but of course I have no idea what his full portfolio is. Then again, “junk” or not depends, according to most opinions, on the ratings agencies, and does anyone trust them anymore? If the annual yield is dramatic, at perhaps 15% a year or more, we’d probably be better off considering any bond to be a bit risky, and if it has an implied return of 30, 40, 50%, we certainly ought to consider that there’s a good chance of default, bankruptcy, or some kind… Read more »
Barry
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Barry
January 9, 2010 1:40 am

I recall Sjuggerud touting Icelandic bonds just about 2 years ago with much the same pitch and I DON’T recall him ever telling anyone to get out of them. Look what happened to them. Totally worthless!

Agnes
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Agnes
February 11, 2010 11:18 am

hi WM,

are you still using mcdonald’s bond trader as of today and will you continue to use it?

Sherkhan
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Sherkhan
February 17, 2010 2:25 pm

Hello WM,

Are you still using the Bond Trader service and what online broker do you use to buy/sell the bonds?

Thanks,
Sher

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