If you're sitting with a safe-deposit box full of bonds purchased long ago and now showing a loss - what do you do? You could hang on grimly, but other options could leave more cash in your pocket.
Reader H. P. H. owns 47 bonds of six different companies with coupon rates ranging from 81/2 to 101/2 percent purchased years ago at or near par. Maturities range from 1986 through 2009. Current market value totals $29,620 for a loss of $17,380.
''Would it be wise to sell these and take a loss, then invest the proceeds to rebuy some deep discount bonds that would yield from 15 to 17 percent or put the cash into money market mutual funds yielding about the same? My tax bracket is about 12-plus percent. Could I use the loss to offset other income?''
A unique opportunity exists for the remainder of this year to take losses and build a lower cost basis for profits in following years.
Bonds are traded today much like stocks, and their prices vary according to general interest rates. Selling one batch of discounted bonds and buying others will not likely match or increase revenue. Assuming the same quality of bonds, a difference between bid and asked prices plus commissions (as much as $30-$45 on each bond) work against the trade.
For example, Reader H. P. H. owns 10 utility bonds, each with a market value of $635 maturing in 2009 paying a coupon rate of interest at 101/2 percent on original value. On the discounted price the $105 annual interest amounts to a current yield of 16.5 percent. Selling such a bond and buying a different one of similar quality would leave you with an asset worth $635, but out-of-pocket about $30, for a net yield of about $605. For a similar $105 current yield, a new bond would need to earn 17.4 percent to break even. Such trades of comparable quality bonds are unlikely on the same day. For a trade to generate the same income, either the risk would be greater - that is, a purchase of lower-rated bonds - or market conditions would need to change.
Tax considerations could make taking the loss this year attractive. Using the same bond figures, instead of $105 in interest, Reader H. P. H. might earn $100. 07 assuming a good trade for a loss in income of $4.95 a year on each bond. His marginal tax bracket (not the average he reports at 12-plus) could be about 24 percent in 1981, about 22 percent in 1982 and 19 percent in 1983. The $1 differential in taxes paid on $100.07 reduces the net loss to about $3.93.
Long-term capital losses could make up the difference. A loss of $380 on each bond ($1,000 original cost less $620) and a marginal tax bracket of 24 percent for 1981 would, on a 2-for-1 basis, offset ordinary income of $190. The tax saving for 1981 at the marginal rate of 24 percent would be about $45.60.
With a cost basis of $605, any sale at a higher price later would generate a long-term capital gain (if held longer than one year). Suppose the bond regained a value of $980, net after commissions, when sold in 1983. The gain of $380 would be taxed at 19 percent of $152 (40 percent of $380) or $28.88. Thus, the difference between $45.66 and $28.88 would represent a tax benefit equal to about four years of lesser net income from the trade.
The above figures apply only to one bond. If your marginal tax bracket is higher, the benefits of switching to take the loss for 1981 would be greater. If gains and losses do not benefit you, I suggest holding until prices recover. Or, if you are investing new money, deep discount bonds could be a good buy now. Brokers as bankers
I understand that at least one major brokerage house operates a cash account in connection with VISA much like a bank. A client may write checks on the account that may include cash in a money market fund plus a portfolio of securities. Checks can be written on the account and charges made through VISA. A quote in a financial paper noted that if the money fund ran low for the client , the loan account takes over, using the customer's securities as collateral. All this is reported only on a computer printout statement. Would the brokers sell securities if the money fund ran low? Does the ''running low'' mean only the client's account or the whole money fund? - G. R.
The cash and securities account you refer to functions much like a bank. You can write checks, trade securities, and collect dividends and interest in a money market fund that today would likely be earning about 15 percent. Generally , these accounts require a minimum of $20,000 in cash and/or securities. Writing checks withdraws funds from the money market fund. If the account runs low, a loan could be automatic as long as sufficient collateral exists. How far down that account could be drawn is a question you should ask the broker. The cash and securities account is not designed primarily for loans. Its main function is to facilitate securities trading.
Investments and deposits are assets
If required to list one's investments in a legal matter, should certificates of deposit be included in the list? Bank personnel I have asked classify CDs as deposits rather than investments. What do you say? - K. R.
Generally, a listing of investments to qualify for a loan or some other legal purpose involves putting together a balance sheet. All assets and liablilities will be listed at current values to gain a bottom line noted as ''net worth.'' All assets, even cash, will be included, along with deposits, securities, etc. Depending on the legal intention, investments and deposits represent assets, and the difference in terminology makes little difference. On the other hand, deposits in a bank or savings institution are insured up to $100,000 if the institution is a member of FDIC, FSLIC, or other insuring organization. But the currently popular repos are investments backed by government securities. Repo accounts are not insured because they are not deposits. Thus, depending on your purpose, terminology could be important.
Readers are invited to send questions to Moneywise, The Christian Science Monitor, One Norway Street, Boston, Mass., 02115. Only a selection of such questions covering topics of general interest can be answered here, and no question can be individually acknowledged. References to specific stocks, funds, or other investments in this column are intended for the general information of readers and not as an endorsement or recommendation by The Christian Science Monitor.m