Who We Are
The BlueCollarDollar was designed as a personal finance center where you will find the complicated world of investing and financial planning explained. We take a common sense approach to the money you earn, your investments (mutual funds, bonds, mortgages), retirement planning (IRAs, 401(k)s, etc.), insurance, mortgages, and debt. We want you to have a financially stable retirement, that is both comfortable and healthy.

Money Focus
Personal Finance

News

Commentary

Updates

Investing

True or False

Mutual Funds

Equity News

Our Portfolios

Outlook

Insurance

Guide

Life

Health

Auto

Home
Mortgages

Buyer's Guide
Taxes

Guide with Calculators
Step by Step
Hot Topics
Contact the Editor

---

Featured Site

Bond Market Association
TradersDigest
AfterHourTrades.com, Inc.
Featured Columnist:

Tax Mama

The Blue Money Report

---

---

All content is © copyright (1998-2003)
BonPaulProductions (all rights reserved)

---

Order your copy of Building Wealth in a Paycheck-to-Paycheck World by Paul Petillo. It is packed with safe, proven wealth-building strategies that cover all the major components of a balanced financial plan, including:

• Straight talk on mutual funds, bonds, real estate, and annuities
• Techniques for avoiding financial disasters
• Tools to help readers track their debt and create a plan for staying out of it
• Road maps to buying a home and saving for college and retirement

When the Heroine Buys Bonds

Dear Editor -- I am writing a novel wherein my protagonist makes a stupid decision to buy into a bond fund because she needs regular cash infusions to supplement her monthly income. The bond fund tanks and she loses her principle as well as any monthly income. I have just discovered how little I know about bond funds, and I was hoping you could answer some questions for me.

Thank you so much for any help you can give me here. I appreciate your time and your patience.

Sincerely,
Catharine

After I answered her questions, she wrote back to thank me for "my lucid answers" and added further clarification about her protagonist's fate, something that would not have happened to lead characters when the stock market looked ever more stratospheric in the late nineties.

Catharine writes:

This bond fund disaster is not the focus of my novel (thank God, because I'm way in over my head here and I know it). It is the precipitating event that changes my protagonist's life and sets all subsequent events in motion. Therefore, it's important for me to get the details right.

Her questions are as follows:

1. Are bonds and bond funds traded on the NYSE? When you go to your broker and ask him to buy shares in a bond fund, where does she go to purchase those shares?

No they are not traded on NYSE, NASDAQ or any other board that trades equities (stocks). You can purchase bonds and bond funds through a broker, or directly from those that are selling those bonds (such as the government) and from the companies who manage those bond funds. A great many mutual fund families have these types of funds. Some companies sell nothing but bond funds.

2. Who regulates bond funds? Is it the SEC? Can this regulatory body suspend trading on a fund that is suspect?

You should understand what a bond is first. It is issued by a company, municipality, or government in an effort to raise money for projects or purchases. The SEC is concerned with how a company operates. They regulate the companies that issue bonds but do not do anything concerning the bond issue. In order to attract investors to purchase these bonds, the issuing entity is often rated by outside companies such as Moodys or Standard & Poors who determine the quality of the debt. If the debt issued is based on rock solid ground (such as the US government, who has never defaulted on a bond payment), the bond receives a high rating such as AAA. As the risk increases, the rating deteriorates in tandem. As the risk increases, so does the opportunity for the investor to make money. This is expressed as yield. To better understand this, when the yield is high, the price is low. The higher the price, the lower the yield.

When we look at these ratings, those with the highest risk, are the ones most likely to not pay investors what they have coming. In other words, the riskier the bond or bond fund, the greater the reward if everything goes well. These bonds are referred to as junk. A much more attractive name is high-yield. Either way, you are taking a chance.

3. Can you give me the name or names of some bond funds that have collapsed? That way I can Google them and glean the internal details of what caused their collapse

Bond funds do not necessarily collapse. If they are holding some very risky investments, they can take some serious losses not only in the underlying investments but in the exodus of investors. Redemptions of invested money are not what a bond fund wants. But bonds fail and so do managers of bond funds. To name just a few of the most recent failures are companies such as Enron and Worldcom. The emphasis during the collapse of these companies was on the share price, but the bond holders took a serious hit.

Just a footnote, the way a company realizes obligations comes in this order: bond holders and then shareholders. Let me explain. Shareholders are owners of the company. Bond holders literally lent you (the shareholder) money to run your company. Therefore, they are entitled to get their money first. In a bankruptcy, the bond holder stands a far better chance at getting something back. The shareholder has no recourse. As to the most spectacular failures, previous companies and their sectors aside, is Michael Milken. He sold millions of investors on junk bonds that he knew were worse than worse. He ended up in jail.

4. When a bond fund fails, does some entity regulate what the shareholders get back? Or must the shareholder try to sell his bond fund holdings for whatever he can get in the open marketplace?

No. Bondholders are not shareholders except in a bond fund. Bond funds usually don't fail. They are mostly absorbed by the fund family, the manager reassigned, and your money, what's left of it, is re-invested within the new fund. Bond investors need to be aware that some bonds are also fraught with great risk. I'll give you an example. Many cheered the Philip Morris penalty that was recently awarded for billions. Municipal bond holders panicked. Many municipalities issued debt, based on the previously arranged payments from tobacco companies to states. These state and local governments needed money now. So they issued bonds based on future tobacco payments. If Philip Morris declared bankruptcy, that (future) money would disappear. Municipalities would be unable to raise cash for projects now because there would be no future money to pay the debt.