Evaluating long-term bonds and a search for piano insurance
Q: I own some GM and Ford bonds. GM bonds are all BBB- (one grade above junk), and some have maturity dates of 2025. Do you think owning GM bonds that mature in 20 years is too adventurous? Should I stay put (in absolute terms, regardless of the overall portfolio composition)?
J.T., via e-mail
A: Bill Larkin, a chartered financial analyst at Cabot Money Management in Salem, Mass., says conservative investors typically purchase bonds for three reasons: price stability, income, and principal preservation.
General Motors bonds expected to mature in 2025 have a similar risk-and-return profile to the "Merrill Lynch High Yield US Corporate C rated 15+ year index." This means that the bond market believes the financial strength of your bond position is associated with substantial risk and considered to be in poor standing.
If you're a conservative investor who can't handle a default scenario, Mr. Larkin thinks you should seriously consider selling your Ford and GM bonds that have maturity dates longer than three to five years. If the financial health of these companies doesn't improve soon, they'll be forced to pledge valuable assets for future borrowing. That places its bondholders in a vulnerable position, he says.
Continuing financial problems have the potential to lead to one or all of the following scenarios: price instability, potential loss of income because of a Chapter 11 bankruptcy, and default. "These are all rock-solid reasons to sell," says Larkin.
Q: I recently purchased a Mason & Hamlin grand piano, and when I insured it on my homeowners' policy, it was like insuring another car! Would a specialty insurance company do better for me? The piano is valued at $45,000.
S.N., via e-mail
A: In the event of a loss, pianos are covered under your personal property limit (contents) and are subject to the deductible. They don't need to be separately scheduled, says Suzanne Pagonis, of the Financial Planning Association of New Jersey.
You should first contact your agent to find out what coverage the company offers and how any claim would be paid. Insurance policies differ as to what is covered. Most companies offer a "named perils" contract, which means you're covered for fire, theft, vandalism, smoke, burglary, and water damage.
The policy deductible would apply, but Ms. Pagonis says there should be no need to itemize the piano separately and pay a separate premium. Ask your agent if your insurance company offers all-risk coverage on contents. If not, obtain a quote from an insurer that offers such coverage. This means that anything that happens to the piano would be covered including accidental damage and mysterious disappearance (but then, any disappearance of a $45,000 piano might be considered a mystery).