Corrections & Amplifications

UNITED PARCEL SERVICE Inc. said it posted a portion of a $600 million offering Monday of medium-term notes designed for individual investors. An article in yesterday's Personal Journal incorrectly said the entire offering of $600 million was posted this week.

(WSJ July 31, 2002)

WALL STREET is making it easier for individual investors to directly own corporate bonds.

Companies traditionally have sold bonds through their underwriters to institutional investors and pension funds. Now, a small but growing number of companies, including heavyweights such as International Business Machines, Household Finance, Dow Chemical and Diageo PLC, are selling a new breed of bonds earmarked for small investors.

The move comes at a time when many investors, burned by the stock market, are snapping up bonds of all stripes. Some of these new bonds pay interest monthly, making them attractive to individual investors looking for a steady source of income.

With interest rates at their lowest levels in years, these new corporate bonds offer substantially better yields than Treasurys. United Parcel Service just yesterday unveiled a $600 million offering of these bonds, set to mature in 2015 and paying interest of 5.5%.

Meanwhile, IBM, trying to raise $1 billion, recently sold a five-year note with a 4.2% yield, well above the 3.39% yield on a five-year Treasury note. Investors can purchase these bonds for as little as $1,000.

"It's bonds made simple," says Thomas Ricketts, founder of Incapital LLC, a Chicago firm that teamed up with Banc of America Securities to begin marketing such bonds in early 2001. Since then, the duo has sold to individual investors a combined $11 billion of these notes for six companies.

The bonds are available for purchase through more than 300 brokerage firms, including all the major Wall Street, online and discount brokerage firms.

There are, however, some downsides to these bonds, known as medium-term bonds, because many have durations of just a few years. The rates on these bonds are often lower than those on bonds sold to institutional investors -- indeed, that's part of the reason companies are issuing them.

For example, Boeing recently sold $7.8 million in 10-year bonds paying 5.6% to individual investors. During the same time period, it sold $600 million of 11-year bonds to institutional investors paying a higher 5.8%.

Second, there's still a tiny secondary market for the new bonds. That means individual investors may be forced to sell their bonds at a discount. Just how liquid the secondary market is remains a bit hazy, "since most investors tend to buy these and hold onto them," says Tom Lee, director of the investor strategies group at Merrill Lynch & Co. For this reason, these bonds are pitched as a buy-and-hold investment.

Still, the explosion of these direct-to-investor bonds is an important development for individual investors. Until now, many individuals shied away from directly owning corporate bonds.

The reason: Traditional corporate bond issues held by institutional investors often trade infrequently, making it hard for individual investors to get competitive pricing. As a result, most individuals instead have bought bond mutual funds, many of which carry hefty fees.

Medium-term notes go on sale every Monday, and their price remains constant -- $1,000 -- for an entire week. That removes the pressure to buy now, and allows investors the opportunity to shop for the bonds that best meet their needs. The idea, says Incapital's Mr. Ricketts, is that "we slow the process down, give people time to buy, and everybody buys at par so they know what they're getting."

Unlike traditional bonds that typically pay interest on a semi-annual cycle, several medium-term notes like those from United Parcel Service, Boeing Capital and others pay monthly interest payments, making it simpler for retirees in particular to create a fixed stream of cash to cover their living expenses. That can make these notes more useful than a bond fund, since investors don't always know the payout they will receive from a fund company.

Many of these bonds carry a feature known as the "death put," or survivor's option. If an investor dies, an heir can sell the bond back to the issuing company at the bond's par value, even if the bond is worth less in the secondary market.

That makes these bonds "useful for estate-planning purposes," says Marilyn Cohen, president of Envision Capital Management, a Los Angeles bond-management firm.

Read the fine print in the prospectus; not all medium-term notes carry this feature, while some companies limit in a given year how many bonds they'll buy back.

There are other risks to consider. The biggest one is interest rates. With rates at historical lows, the next big move is likely to be up. Bond prices move inversely to rates. Thus, if rates rise, the value of your bond will go down. This isn't an issue, of course, for investors who buy bonds at the initial offering and hold to maturity since each bond is redeemed for the original $1,000.

And don't forget company risk. Remember, Enron Corp.'s bonds were investment grade at one point. Also, with only 17 issuers in the market at the moment, there's not a lot of opportunity for diversification just yet. That should abate, though, "because these are growing more popular with companies," and the choice of offerings is expected to expand in coming months, says Merrill's Mr. Lee.

James Stenson, global head of high-grade capital markets at Banc of America Securities, a unit of Bank of America Corp., says Incapital/Bank of America are in talks to sell the notes of five more companies that he says are "extremely recognizable" names.

LaSalle Broker Dealer Services, a division of ABN Amro Financial Services, says it will be issuing the notes of other new players in the next couple weeks.

Some notes are also callable, meaning the issuing company has the right to retrieve them at their $1,000 par value after a certain amount of time. Investors don't lose money, but companies usually do this when interest rates are lower, so you could be forced into a frustrating hunt for a replacement investment paying a similar yield.

You don't pay a commission to buy medium-term bonds; if you want to invest $5,000, it will cost exactly $5,000. The commission is built into the price since underwriters buy the bonds from the issuing company at a slight discount.

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                  Comparing the Bonds 

  Here's a look at some of the medium-term bonds that have been issued 
recently by investment-grade companies. Similar bonds are available 
every Monday. 

Coupon          Payment    Survivor's   Maturity    Date 
Company          Rate      Frequency    Option    (Aug. 15) 

Household       3.75%     Semi-annual    Yes        2004 
Finance         6.875%    Monthly        Yes        2012 
United Parcel 
Service         4.00%     Monthly        Yes        2008 
Caterpillar 
Financial       2.50%     Monthly        Yes        2004 
Services        3.25%     Semi-annual    Yes        2005 
Boeing Capital  3.55%     Monthly        Yes        2005 
                4.95%     Semi-annual    Yes        2009 
General Motors  4.50%     Quarterly      Yes        2004 
Acceptance      5.60%     Monthly        Yes        2007 
Freddie Mac     3.50%     Monthly        Yes        2006 
                5.75%     Monthly        Yes        2022 

  Source: WSJ research