Father Sez

From and to parents - parental advice to our children on personal financial management and life.
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Posts Tagged ‘deep discount bonds’

We have just added some more “deeply discounted bonds” to our investment portfolio

Monday, June 9th, 2008

frim-gaharu-0051.jpg

Deep discount bonds are those which are sold at a big discount to their par values because they are zero coupon bonds (bonds that pay no interest), bonds with bad credit or suspect ability to pay, or a longer bond with a very low coupon requiring more yield in the form of a lower price.

The bonds that we have bought are of the 1st variety, i.e. bonds that do not pay any income/ interest but have a thundering maturity value. My family has chosen these bonds in the form of gaharu trees. 

Last Thursday, we collected 100 trees from the Forest Research Institute of Malaysia (FRIM) where they grew these trees using a tissue culture process. They had thousands of these little plants growing in small plastic bags in a number of greenhouses. We were informed by the research folks at FRIM (and this is also confirmed by Wikipedia) that these trees (when they are around 5 years of age) have to be inoculated with a parasitc ascomycetous mould, Phaeoacremonium parasitica, a dematiaceous (dark-walled) fungus. (All these are still rocket science to me. I have to find out more over the next 5 years.)

As a response, the tree would produce a resin high in volatile organic compounds that aid in suppressing or retarding the fungal growth. While the unaffected wood of the tree is relatively light in colour, the resin dramatically increase the mass and density of the affected wood, changing its colour from a pale beige to dark brown or black. High quality resin comes from a tree’s natural immune response to the fungal attack. It is commonly known as agarwood #1 (first quality). An inferior resin is created using forced methods where aquilaria trees are deliberately wounded, leaving them more susceptible to a fungal attack. This is commonly called agarwood #2.The “trees” (as the picture shows, they are still teeny tots), are 10 months old now. We cannot transplant them in our rubber smallholding as they would be eaten or stepped upon by the local goats that somehow find their way into the smallholding. 

We have decided to build a small shelter for the trees at a corner of our goat farm and nurture them there for another few months or a couple of years if need be. (I am not sure of the growth rate of the trees.) Once they reach about my height, then they can be comfortably transplanted. We have been assured by the FRIM research people that soil that is good for rubber trees would be great for the gaharu trees.

Harvest time should be in about 9 years.  

The Malaysian Business, one of Malaysia’s premier business magazines wrote in December 2007, that a kilogram of the tree could fetch a price of about Ringgit 3,000 – Ringgit 25,000 (approximately USD900 – USD7500 at current exchange rates) depending on the grade.  

These trees, if properly looked after, should give us a good return. I am not sure of actual figures, but I think it’s safe to assume that one tree should easily yield more than a kilogram. 

I think these trees are as good as any deep discounted bonds that are in the market. Since there are 100 trees, they can be compared to diversifying our risks amongst 100 companies, though they are all in one industry.  

Each time my family visits the goat farm (which should be very often after the planned launch date of the 22nd June), I would be able to show the trees to my children.

Hopefully these trees will repay our care and love for the next nine years or so in the form of super duper returns.

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