Profiting from the short-term debt of big companies

QAn annual report for a mutual fund mentioned that 17 percent of its assets consisted of corporate short-term notes paying about 6 percent. Why do wealthy corporations such as General Electric and Coca-Cola need massive cash infusions? What do these corporations use as security for their notes besides their prestige? Why do funds buy these notes?

A.A., Potomac, Md.

A Corporations issue short-term debt paper to cover short-term expenses. The firms in turn pay off the notes through their earnings. In many cases, handling debt with short-term notes is easier for accounting purposes. Companies may also be able to generate a higher rate of return than the 6 percent they pay out to note holders.

Returns on short-term debt are not guaranteed, but investors can assess a company's ability to repay based on credit ratings from agencies such as Standard & Poor's and Moody's.

Mutual funds like short-term notes because they offer interest rates slightly higher than money-market rates and because they often come from firms with a proven payment history. It is also a way for funds to tie up short-term cash not yet placed in the stock market.

QI read somewhere about a mutual fund that I think was called Alternative Solutions. It invests heavily in fuel-cell technologies. But I can't locate this fund. Can you?

J.S., Alpine, Texas

AA search of databases at information-firm Morningstar Inc., the SEC's Edgar system, and the Social Investment Forum (which screens funds for their social values) came up empty.

You may be thinking of the New Alternatives Fund (www.newalternativesfund.com, 800-423-8383). This "green" fund invests in fuel-cell companies and other renewable-energy firms.

QShould I include a Treasury-bond fund or municipal-bond fund in my 401(k) plan?

R.H., New York

AAccording to Eric Tyson, author of "Personal Finance For Dummies," investors should generally avoid buying tax-sheltered bonds for their tax-sheltered retirement accounts. (Treasury bonds are free of state and local taxes; municipal bonds are usually free of state and federal taxes.)

Since tax-free bonds yield less than taxable bonds - such as high-quality corporate bonds - you would in effect be losing potential earnings.

Questions about finances? Write:

Guy Halverson

The Christian Science Monitor

500 Fifth Ave., Suite 1845

New York, NY 10110

E-mail: halversong@csps.com

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