Style,
Yeah, well when you do the math I'm not sure these YEELDS all that exciting. However there are a few benefits for conservative investors - I guess.
The way I read it, say you buy 1000 yeilds - that would be $66,500
Each year you would recieve $3.33/share or $3,330
By maturity (2/26/01) you will have collected just under $10,000. So you've reduced the cost of the investment to $56,500. I'm ignoring time value of money. If you incorporate that the numbers get a bit worse. With inflation in check though it shouldn't change too much.
At maturity you get the lesser of 151.5% of the issue price (66.5x151.5%=100.75) or whatever Cisco is trading at at maturity. So in effect there is a ceiling at 100.75/share. If Cisco trades higher you don't participate. If CSCO trades lower, well you get that lower rate. So look at best case.
You invest $66,500:
You get $10,000 in "dividends".
AND Cisco is trading at 100.75 so you get your $100,750 at maturity for a return of 66% (over 3 years) or an annualized return of around 20%. Note that if you owned the stock you would not have recieved the $10,000 so you're better off in the YEELDS in this scenario assuming you didn't sell on highs and buy on dips. That is you held for the entire period.
Worst Case:
You invest $66,500
You get $10,000 in dividends.
CSCO tanks to 20 (I don't think you can get out; I think that's one of the catches...there's another one <below>. They get to use your money and you get back squat - potentially). You get back $20,000 at maturity for a total return of -55%. Again, if you held the security you could get out and cut your loses. You may? not be able to do that with the YEELD. We should find out. If you're stuck... eeesh.
Another Not So Great Case:
You invest $66,500
You get your $10,000 in dividends.
Cisco rockets to 150! Yesss. The underwriter only pays you 100.75/share and they pocket the rest. So, they get the use of your funds AND they get to pocket a large % of the value at maturity (this stinks). You get your 66% (20% annualized) return <yawn> and they walk away with an easy $50,000.
In the end the 5% is the interest rate thier paying YOU for the use of YOUR money. (not a bad rate for them). At the end of the "loan" they only have to pay you the value of the stock....unless it's trading higher than 100.75. That's the ceiling. Why is there a ceiling? So, the underwriter has absolutely no skin in the game unless Cisco is trading somewhere between 100 and 107 at maturity...then thier out their dividend payments in addition to paying the full value of 100.75.
Questions:
Can you trade the YEELDS and if so how does ownership transfer?
What if they default, how can you collect?
Are they insured?
This is my take. anyone else? I'm certainly no expert on this...
Gary |
