GM bonds: Big trouble for small investors

(CNNMoney.com) -- Harley VanDeloo, a 69-year old retiree in Thousand Oaks, Calif., has resigned himself to losing an important piece of his retirement income: interest payments from $25,000 worth of General Motors bonds.

The bonds were due to pay VanDeloo about $1,000 twice a year, an important supplement to his social security benefits that he said are his main source of income.

"It's not going to kill us, but it's significant," he said about the loss of income.

VanDeloo, a self-described car enthusiast who says his GM van is the best car he's ever owned, bought the bonds at a 20% discount just over a year ago. He believed GM (GM, Fortune 500) was on the verge of a turnaround and that the bonds were relatively safe despite having already been downgraded to junk bond status by the rating agencies.

He said he didn't care about the bonds' prices. He was attracted instead to the better than 8% yield the bonds paid. "They were due to be paying off well after I'm gone," he said about the debt, which matures in 2033.

VanDeloo said he had been hoping that GM would avoid bankruptcy right up through January of this year. But as the company's sales and financial performance continued to sink, so did his hopes for his income stream. The January payments did arrive, but he thinks the automaker is likely to default on its debt before the next payment is due in June.

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