If your stomach can't take the stock market's roller coaster ride Ñ even though the journey lately has been on the upside Ñ a dollop of bonds in your portfolio could calm your nerves.

And Wall Street, for its part, is beginning to make it easier for small-fry investors to buy certain bonds.

A small number of corporate household names are selling a new type of fixed-income security, or bond, designed for small investors. They go by such catchy names as IBM Notes, UPS Notes, SmartNotes (from General Motors Acceptance Corp.), PowerNotes (from Caterpillar Financial Services) and electronotes (from the Tennessee Valley Authority). Most brokers, from Merrill Lynch to Charles Schwab, sell them. And their maturities range from nine months to 30 years.

'Most of the buyers are retirees or pre-retirees trying to stabilize the return of their portfolios,' says Mark Hines, a broker with the Cedar Hills branch of Edward Jones Investments.

The generic name for these bonds is direct access notes (or DANs), and you can get a wealth of information on them from the Web site (a site produced by Abn Amro

Financial Services Inc.).

Direct access notes have several advantages for small investors. One is that you don't have to play the usual guessing game to figure out how much of a brokerage commission might be built into the purchase price you are quoted. These notes go on sale every Monday and are sold at face value Ñ $1,000 per bond, including commission Ñ for that entire week.

If you want to invest $10,000, for example, it will cost you exactly $10,000. Normally when you buy bonds, the price you pay can vary, depending on the commission as well as whether you buy them at a discount (and pay less than par, or face value) or at a premium (and pay more than par).

The fact that these bonds stay on sale for the same price for an entire week takes away some of the time pressure to buy quickly from whatever is in a broker's inventory at the moment.

Because individual investors typically buy in small amounts rather than jumbo lots of 100 or more bonds, as institutional investors do, they often don't have much to choose from. Direct access notes, however, give them the chance to shop around for bonds that best meet their needs in terms of maturity and credit quality.

Shorter-term bonds usually pay lower rates than those with longer maturities, while companies with top credit ratings usually pay

lower rates than those with a clouded credit outlook.

Rates on direct access notes vary widely, depending upon the borrower's credit quality and maturity. Last week, for example, rates ranged from 2.25 percent for Caterpillar's PowerNotes due in October 2004 to 4.25 percent for GMAC's SmartNotes due in April 2004 to 4.6 percent for TVA's electronotes due in October 2014.

Up the 'ladder'

Hines says these bonds are ideal for bond 'ladders' in which a pot of money for fixed-income investments is divided up into different segments of staggered maturities.

Someone with $100,000 to invest, for example, might put a third of the money into short-term notes, with maturities ranging from a few months to a few years; another third into intermediate-term bonds, with maturities ranging from three years to 10 years; and the final third into long-term bonds, with maturities ranging beyond 10 years.

'Generally, these (direct notes) fill out the intermediate- to long-term rung of the ladder,' Hines says.

Another plus for retirees is that many of the bonds pay interest monthly or quarterly, rather than semiannually the way traditional bonds do. This creates a steady stream of income that can help cover living expenses, and it makes them more reliable than bond funds, whose monthly payouts can be somewhat unpredictable.

Many of these bonds also have a useful estate-planning feature called a 'survivor's option.' If the original investor dies, heirs can sell back the bond to the issuing company at par, even if the bond is worth less in the secondary market. With traditional bonds, by contrast, heirs may get less Ñ or more Ñ than that depending upon market conditions.

Here's the flip side

There are some drawbacks to these bonds. The biggest one is gorging on fixed-income investments at the wrong time in the interest-rate cycle.

'You don't want to load up on bonds when interest rates are at a 40-year low,' Hines warns. Since rates are likely to move upward Ñ though just when is open to question Ñ it's not wise to put all your eggs in one low-rate basket, since the return on the basket probably will increase if you wait for a while.

Also, because bond prices move in the opposite direction from interest rates, the value of your bonds will decline once rates make a sustained move to the upside. This is not an issue if you plan to hold them until they mature. But if you think you may need to cash in your bonds early, beware Ñ you may get back less than you invested.

Another potential drawback is that some of these bonds have a 'call' feature, which means they can be redeemed at par after a certain amount of time has elapsed, often four years. Typically, issuers call bonds when rates have dropped and they can refinance their debt at lower cost. If this happens, you probably would have trouble finding another investment that would produce a comparable yield, even though you'd get back your principal.

Deborah Rankin, an awardwinning former personal finance columnist for The New York Times, is based in Portland.

Contact her at This email address is being protected from spambots. You need JavaScript enabled to view it..

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