With all the global and domestic economic uncertainty, many investors have been keeping their savings in

money market funds, usually getting less than .5% annually and sometimes even losing money after fund
expenses, and certainly not matching inflation. The Federal Reserve has repeatedly communicated the
likelihood that short term rates will remain low for some time. Because unemployment is much higher than in
typical recessions, inflation is low and trending lower, and bank balance sheets are seriously impaired with
residential and commercial real estate loans, the Fed is not likely to raise rates to ‘neutral’ levels for several
years.

In the meantime, current market dynamics offer investors an opportunity to put their money to work with
limited risk and substantially higher returns than cash is paying. For instance, 3 year BB rated bonds are
yielding 5% on average. The short maturity limits interest rate risk, or the risk that a bond will lose value due
to rises in interest rates. In fact, 3 year bonds have about a third of the interest rate risk as a 10 year bond.

BB rated bonds are considered high yield bonds and therefore will have higher default rates on average.
However, by buying 3 year bonds, the default risk is mitigated. For example, according to a 30 year study by
Moody’s, the cumulative default rate for BBB rated bonds over 10 years is 4.9%, whereas the cumulative
default rate for BB rated bonds over 3 years is only 6.1%.

Using the above examples, a one million dollar portfolio of 3 year BB rated bonds would yield roughly
$150,000 over a three year period, compared to less than $10,000 for a cash portfolio. In a worse case
scenario, even if default rates double and there is no recovery on the bond (historical recovery rates for
corporate bonds are about 45%), the portfolio would still have a return of about 3 times over a cash portfolio.

Below are some 3 year bonds from household names yielding over 5%.

Company Coupon Maturity Yield Price Moody’s S&P Industry

Sears Roebuck 7.5 1/15/13 6.99 101.15 Ba3 BB- Diversified

Royal Caribbean 7 6/15/13 7.29 99.25 Ba3 BB- Cruise Lines
SLM (Sallie Mae) 5.375 1/15/13 6.65 97.12 Ba1 BBB- Cons Loans
US Steel 5.65 6/1/13 5.19 101.2 Ba2 BB Steel
Wilmington Trust 4.875 4/15/13 5.93 97.38 Ba1 BB- Fiduciary Bank

Tex
SVP, CCM, Inc.