Oct 062015
 

I might lose my entire bond

Bonds are usually safer than stocks. But it’s also possible to lose a lot of money in bonds if we’re not careful. Last year I blogged about buying $5,000 of Sherritt’s high yield bonds. I made this decision based on the attractive 8% annual yield! 😀 Sherritt International Corporation is a mining and energy company that operates in Canada, Cuba and Madagascar. Sherritt’s primary business is mining and refining nickel ore and similar base metals.  I expected the bonds would mature in November 2018 and I’d get back my principal. However, a lot of things have changed since 2014.

Sherritt bonds plummet in value

As with all mining companies, the value of Sherritt’s business depends heavily on the price of the underlying commodity it sells, in this case, nickel. When I bought the bond last summer the spot price of nickel was roughly $9 per pound. And it appeared to have stabilized. However, 15 months later, the price has now dropped in half to just $4.5 a pound. 😕 Below is a 5 year chart of the price of nickel.

15-10-sherrit-bonds-nickel-price-chart-5-year

Obviously this had a devastating impact on resource and mining stocks. Teck Resources and Freeport-McMoRan are both down about 50% year to date. And Sherritt is down 70%. I guess you can say these mining companies have hit rock bottom. ? Even though I don’t own any Sherritt stocks, I’m still a little concerned as a bond holder. With the common share price dropping this low, there’s a real chance that Sherritt could file for bankruptcy protection in the foreseeable future. And if the company’s board of directors choose to do that before my 2018 bonds are due then I may not get my $5,000 principal back. 😐

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Jul 292014
 

[Edit] The following post was written in July 2014. I’ve posted an update in October about my purchased Sherritt Bonds. It’s not doing so well. [/edit]

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Investing in High Yield Bonds

Last year I blogged about wanting to invest in bonds as one of my goals because I’ve heard smart people invest in stocks, but smarter people invest in bonds 😉 Then earlier this month I wrote about taking out a loan and have dedicated some money to buy bonds with.

Well I have finally taken the plunge into bonds. Yesterday morning I purchased $5,000 face value of the Sherritt International Corporation 8% bonds, maturing on Nov 15, 2018, for the price of $104.475. I will explain the jargon in a moment, but essentially what this means is I have made an investment of roughly $5,200. And by the end of 2018 that investment will turn into $6,800. That represents a 6.8% annual return 😀 It’s not the best investment ever, but it sure beats the low returns on 5-year CDs and GICs.

14-07-sherritt-bond1

Bonds are generally safer investments than stocks because if a business goes bankrupt bond holders have priority over shareholders 😛 muahaha. I’m not 100% sure on this so maybe Chuck the bond trader can weigh in, but I assume this means my 6.8% bond return is pretty much guaranteed as long as Sherritt stays in business until my bonds mature. Considering how the company’s stock is part of the S&P/TSX Composite index and it hasn’t missed a quarterly dividend payment in almost a decade, I think my 6.8% return is pretty safe 🙂

I will discuss three topics in today’s post: Why I’ve decided to buy these bonds. How to buy bonds. And what are the risks and expected returns of my new bonds.

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