GM Bonds for Life

General motors has close to 4.5 Billion dollar worth of bonds.
The bonds are of 25 Dollar face value and have Annual interest rates of 7.25% to 7.5%
These are long term bonds with maturity dates of 2044 to 2051

The bond are traded as stocks with the following ticker symbols, their interest rates, Actual return on investment if you buy them today(Feb 12,2009) .. and their expiration dates.

1. GMW: Interest Rate 7.25% : Interest per annum= 1.8125USD
Current Market Price=3.13USD : Yield = 57.9% per annum till 2041
2. XGM: Interest Rate 7.25% : Interest per annum= 1.8125 USD
Current Market Price=3.17 USD : Yield=57.17% per annum till 2041
3. GMS: Interest rate 7.5% Interest per annum=1.875 USD
Current Market Price=3.28USD : Yield=57.16% per annum till 2044
4. BGM: Interest Rate 7.375% Interest per annum=1.84375USD
Current Market Price=3.15USD : Yield=58.53% per annum till 2048
5. HGM: Interest Rate 7.375% Interest per Annum= 1.84375 USD
Current Market Price=3.32: Yield=55.53% per annum till 2051
6. RGM: Interest rate 7.25% : Interest per annum=1.8125 USD
Current Market Price=3.10USD : Yield=58.46% per annum till 2052

- Auto industry and GM are percieved as the most negative industries.
- The US Auto companies have been in losses from times in memorial and loosing market share to their Asian counterparts.

But here are the salient features which should be kept in mind.
1. Feb 8, 2008 these bonds were quoting at around 16 USD
2. Sept 10, 2008 these bonds were quoting at 10USD.
3. GM has never defaulted on its bonds in the history of the company (which spans 100 years)
4. Even if the company is reporting losses the interest on the bonds have to be paid.
5. The face value of the bond is USD 25 so if GM buys back the bonds it has to pay you 25 dollars ie 8 times your cost of USD 3 per bond. (this is addition to the interest of 1.8USD every year)
6. If for some reason the tide turns and GM becomes profitable these bonds could quote at USD 25 or more (june 2004 the bonds had a market price of 26USD)
7. In case of bankruptcy generally bond holders are paid 25 cents to a dollar (75% discount to face value) as per bond experts, 25 cents to a dollar for a 25USD bond is 6.25USD (which is 100% above the current market price of 3USD)
8. As per GM starting 2010 GM will save 7 billion dollars in healthcare costs for retired employees.
9. GM is going to launch Chevy Volt in 2010 which is touted to have a Fuel economy rating higher than new Toyota Prius ie 100+MPG.
10. For us to continue to receive the 50% interest every year GM has to be solvent not profitable.
11. GM has largest market share in China and is profitable in the asian market.(Future growth market)
12. These bonds are staggered ie. the record dates for dividents are different.
RGM Record dates are: Jan31, Apr31, Jul31, Oct31 (interest rates are paid quaterly)
HGM Record dates are: Dec 15, Mar 15, Jun15, Sep15 (Interest are paid quaterly)
With proper planning you can switch from one bond to the other and get twice the divident ie 1.8 x 2 = 3.6USD per annum.

Various Scenarios:
- buying 1000 Bonds at 3.19USD ie investing 3190USD you will receive 1833USD every year till 2046 ie next 37 years and at the end of tenure GM will pay 25000USD.
- if GM goes bankrupt you will receive 6250USD
- if GM buys back the bonds you will recive 1833USD every year + 25000USD when GM buys back the bonds
- if GM does well the bond will quote close to face value and you can continue to receive the interest of 1833USD every year or encash and receive 25000USD (sell at market rates)
- if you are over smart and try and time your buy and sell to get twice the interest by switching between record dates.. of different bonds you can make 3666USD every year as interest and also expect the payback at face value 25 USD.

All said and done what is the most important thing to do?.. Take that first step and buy the correct bond from the stock market (not from GM)

Here is the link to GM website where you can get the prospectus.