B

#### Bill Woessner

recent thread about GMAC bonds made me start poking around to learn

more. I found some information on GM's bonds on their web site:

http://www.gm.com/corporate/investor_information/fixed-inc-sec/

Just for the sake of an example, let's look at XGM. According to

Google Finance, XGM closed at $5.54 yesterday. That's on a par value

of $25. The coupon rate is 7.25% and there's roughly 32.5 years left

to maturity.

One interesting thing I noticed is that the bond pays $1.8125 per year

in interest. At that rate, it would only take 3 years to earn back

the current cost of the bond. In other words, as long as GM doesn't

default on these bonds in the next 3 years, you'll at least get your

principal back.

But assuming you hold on to the bond until maturity (and GM doesn't

default on it), what kind of return will you get? It seems simple

enough to calculate. The bond will pay $1.8125 per year for 32.5

years. That's a total of $58.90625 in interest. And when the bond

matures, you get the par value back. That's another $25 for a grand

total of $83.90625. That makes for an equivalent continuously

compounded interest rate of ln(83.90625 / 5.54) / 32.5 = 8.36%.

Except... there's a major difference. In a traditional compounded

interest scenario, you have to reinvest your interest. That's not the

case here. In fact, the concept of reinvesting interest isn't even

applicable unless you consider the case of buying new bonds. So maybe

this bond has MORE than an 8.36% rate of return? Not sure how to

think about that.

Anyway, that was my first foray in to thinking about bonds. Is all of

this correct? BTW, I'm certainly not advocating buying GM bonds.

This was just a thought exercise.

Thanks,

Bill