Tahoe-Truckee Market Beat: ‘Death puts’ — aka, the ‘survivor’s option’
March 17, 2015
Record-low interest rates over the last few years have made it a difficult time for fixed income investors.
In a normal interest rate environment, a conservative income investor with $1 million to invest could expect to receive an income of $45,000 to $50,000 per year by investing in benchmark 10-year US Treasury bonds.
Today, the 10-year Treasury is yielding about 2 percent, so you'd only get about $20,000 per year from that same million.
Most people are expecting interest rates to rise eventually. When they start rising and how fast they increase is a matter of conjecture. When rates rise, bond prices fall. If you hold long-term bonds in a rising rate environment, the price of those bonds will drop.
There are many strategies investors can employ to prepare for rising rates. What you do is an individual matter and should be tailored to your own goals and situation.
If you prefer to invest in individual issues and not use bond funds, there are features available with some bonds that can be beneficial if rates rise.
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One is what's known as the "death put." It sounds rather ominous — another term for "death put" is the survivor's option, which sounds a little nicer. Having a survivor's option on your bonds can be a good form of insurance in certain situations.
The way it works is pretty simple. Say you want to buy a long-term bond today for the income and aren't concerned about rising rates and falling bond prices while you're living, but would be concerned about the value of your estate in the event you were to pass away prior to your bond maturing.
If you were to buy a bond that has a survivor's option and it died before it matured, the beneficiaries of your estate would have the right to collect par value for the bond from the issuer.
So, you could buy a bond today, collect the income and have some peace of mind, knowing that in the event of your untimely demise, your beneficiaries could get full price for your bond and would have some protection from a rising interest rate environment.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.