Q. I’m heavily invested in Treasury bonds and concerned about the possibility of rising interest rates. Can you tell me what “par value” means and how it relates to the coupon that I receive?
H.M., via the Internet
A. Par value is the face value of a bond, meaning the price the issuer promises to pay on its date of maturity.
Interest rates affect an existing bond’s price movement. If rates increase, the price of the bond would drop. If they go lower, the bond’s price increases.
Meanwhile, the coupon rate is the amount of interest the bondholder actually receives as a percentage of the par value. Since you’ll get back your original investment if you wait for your bond to mature, the only reason for concern about rising rates is if you would sell before maturity.
“If you have $10,000 invested in a Treasury bond paying a coupon of 3.375 percent, you have $10,000 in par value and the stated coupon is fixed for the life of the issue,” explained Harry Resis, Chicago-based director of U.S. fixed-income for Henderson Global Investors. “While that’s how it works for Treasury bonds, remember that corporate or junk bonds also carry credit risk related to the risk of default of the issuer.”
Q. I own a handful of somewhat aggressive growth funds and I’m looking to balance them with something more conservative. What’s your opinion of Fidelity Equity-Income Fund?
K.C., via the Internet
A. It’s been a steady, conservative performer, averaging a 12.9 percent lifetime return over 37 long years.
That’s not to say that it hasn’t had weak periods, such as the late 1990s when high fliers ruled and value investing was out of style. Yet it remains a core fund, well-suited to the portfolio of the not-so-aggressive investor.
The $21 billion Fidelity Equity-Income gained 18 percent over the past 12 months and had a three-year annualized decline of 1.34 percent. Both results rank around the midpoint of large value funds.
“This fund represents value investing at its best, and it does as well or better than most growth stock funds over time,” said Jack Bowers, editor of the Fidelity Monitor (www.fidelitymonitor.com) newsletter in Rocklin, Calif. “It has heavy reliance on financial stocks, which right now is good because it’s easy to make money with the current rate spread.”
Stephen Petersen, portfolio manager since 1993, spreads risk among more than 200 stock names and includes some bonds and cash. Previously an analyst for the airline and insurance industries at Fidelity, he has the benefit of the firm’s large research staff as he makes his selections.
The fund should benefit from tax-law changes that encourage dividends because it has emphasized undervalued blue-chip stocks with yields higher than the Standard & Poor’s 500.
Nearly one-third of the fund’s holdings are in financial-services stocks. Other significant groups are industrial materials and energy. The top stock holdings were recently Citigroup, ExxonMobil, American International Group, Bank of America, Fannie Mae, Merck, J.P. Morgan Chase & Co., Verizon Communications, Total SA and BellSouth.
This “no-load” (no sales charge) fund requires a $2,500 minimum initial investment and has an expense ratio of 0.71 percent. A small capital-gain distribution is scheduled for the fund for mid-December, which means investors in taxable accounts should wait before buying.
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Andrew Leckey answers questions only through the column. Address inquiries to Andrew Leckey, #184, 369-B Third St., San Rafael, CA 94901-3581, or by e-mail at andrewinv@aol.com.
