Buy coal bond

Not sure how many of you really know bond investment. I bet not many. Just some basics. Difference between bond vs stock investment is just like lender vs owner. If you buy a bond, you basically lend your money to the business or the government. Your expectation is to get pay via interest and you don't care whether the business is doing well or poorly. It is a legal obligation that the business must pay you the interest as long as it is not bankrupted. So the only thing you care about is that the business is still alive even if it is not making money because legally it must pay you first. Just think about your mortgage obligation. Will the bank waive your monthly payment because you are not doing well financially? You are kidding me. On the other hand, if you buy a stock, you are basically part of the owner of the company, even so very tiny part for most of us. As the owner, you will only get pay if your business is doing well, right? There is no law saying that your business must legally pay you first! I hope you can understand the difference now: buying bonds is generally much safer than buying stocks but the earning is fixed via the predefined interest rate. It won't go up even if the business is doing well and it won't go down even if the business is doing poorly unless the business is bankrupted. If you buy a bond from a reasonably well company, your money is rather safe. Actually even if a company is bankrupt, most of the time the bondholder can get at least part of their money back via liquidation. Rarely they will loose everything but it may well be a total loss for shareholders if a company is not dong well.

A bond is usually issued at a face value of $1000 with a fixed interest and duration. You get paid by the interest for the duration and you get your principle back at $1000 per bond when it matures. Sometimes, a bond price will be less than the issue value, i.e. less than $1000. Say if you buy a bond at $850, you get a discount but you will still get back at $1000 per bond if you hold it up till maturity. So you will make $150 capital gain, in addition to the interest you have accrued.

Right now, the coal sector is very depressed and almost everything in this sector is on fire sale, including bonds. I think you can buy the Arch Coal bond at discount. Lately Goldman Sachs has just upgraded the outlook for Arch Coal stock, which is a good sign that this company may likely have reached its bottom. In other words, there is relatively safety in investing this bond.

The bond I'm talking about is Arch Coal’s 9.875% bond that matures on 6/15/19. Right now, it is priced at around $890 per bond. The CUSIP is 039380aj9.  Since the interest of 9.875% is based on the face value of $1000, your real interest income would be higher at around 11% based on your discount price of $890. As long as you hold the bond, you will guaranteed to be paid at 11% till Jun 15, 2019 as long as the company is still running. At the maturity, you will get $1000 per bond, another $110 gain per bond. If the coal industry is really recovering in the next few years, which I highly expect, your bond price may even go higher than $1000. If that happens, you can also decide to sell your bond earlier than 2019 with more profit.

Trading bond is a bit different from stocks. In Etrade, you can search a bond with the CUSIP number at the bond platform and then request for a quote of its price. Given its relative safety and reliable income, you may want to consider to add some bonds into your portfolio to diversify. One last note, bond price is sensitive to and inversely related to interest rate. It is almost guaranteed that the interest rate will substantially go up in the long run and bond prices will go down with it.  Generally speaking, don't buy long-term bonds beyond 7 years of maturity as short-term bonds are not so sensitive to interest rate increase and you can always hold your bonds to maturity to get your full money back regardless of bond price.