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The Spiders Are Back

The spiders of Wall Street are back.At least that was my thought when the notice of a new bond crossed my desk.

This one has a coupon rate of 9% and is fifteen years to maturity. That is a warning sign up front “there is a game afoot.” When the coupon is more than three times the ten year Treasury note interest rate, you know there is risk. Lots of it.

This one is a “Dual Range Accrual Callable Note”. It is 100% “protected” until the Standard & Poors 500 stock index drops fifty percent. Oh my. But wait there’s more…

The interest rate calculation, after the first coupon, pays you based on the difference between the yields of two year and ten year maturity swaps. This is designed to be sold to individuals, who are unlikely to know what a swap even is, let along be able to do the calculations to understand how they will be paid.

Of yes, and they can take it back from you before maturity, if it is profitable to you (and not them).

We hate these kinds of bonds. They tarnish those in investing who actually put the client first. They prey on individuals who are greedy on yield. “Will you walk into my parlor?” said the spider to the fly.”I

Unfortunately, there will always be flies, so there will always be spiders.