March 2008
You are currently browsing the articles from Investing in Bonds written in the month of March 2008.
Investopedia as the name implies is basically the wikipedia of all things concerning investing, though suffice it to say, Investopedia is much more detailed, complete and accurate, being under the Forbes group of media companies . Navigation is easy; It has a functional organizing and archiving interface, which are divided into many categories and subsets.
Investopedia has everything one needs to know about money, finance and investing. Like most information websites, Investopedia aims to promote good business sense, successful investments, and the importance of street-smarts in a numbers and statistics driven world.
Navigating Investopedia is simple. Don’t know a meaning of “junk bonds?” There’s a dictionary that can be consulted when faced with technical business jargon.
Want to know the latest activity in the stock market or how the new oil hikes are affecting the economy? It has regularly updated news articles regarding economy and business globally, nationally and locally.
Don’t know where to start or looking for some refresher courses? It has a wide selection of detailed tutorials and faq (frequently asked questions) for investing amateurs and beginners.
Sure you know enough? Right after tutorials, you can test your knowledge with the exam preparation section, though this may also be used by those taking up MBAs or Executive MBAs (Masters in Business Administration).
Seeking answers to questions you’ve never seen asked anywhere else? It has forums and help desks that encourage discussion about the business world at large.
Want to see if stocks is the right investment for you without actually risking anything first? It has stock simulators that may be used to gain hands-on understanding of stocks and bonds investments.
Want to belong to an organized group of individuals making their own investments? It has a stock community where members can rank their most successful stock investments, and receive tips and information.
Finally, if you’re looking for ideas and visual representations of figures, they have the stock ideas, which feature all sorts of advice– from charts to reports.
Investopedia is your one stop shop for all those investment queries. Don’t invest without consulting it first!
Written by admin on March 27th, 2008 with no comments.
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Investing, as process involving plenty of assets and money requires a lot of thinking and strategic planning before being accomplished. The goal of most investments is pretty simple– to earn money, or assets, or some form of measurable currency. Some invest for non-material essentials such as education and health, but these ultimately lead to things concerning money (as everything has a price in the world)
The first thing that investors should have is a goal. Lots of money and no goals will not lead anyone anywhere. Whether it’s as simple as having x amount of money in the next y number of years, or as complex as having increasing increments of regular income by means of several business endeavors, there must be a goal.
Second, one must have a plan, and a detailed, well thought-out one at that. Plans freshly hatched have a habit of tumbling from the nest straight into the hunter’s stewpot after all. It doesn’t have to be extremely elaborate, just one that would not put the investor at risk, though it must include the amount or worth to be invested, and how the process of achieving said goal will go.
Third, one must choose the form of investment. As I’ve said, there are lots. One may go the safe way and go for a bank, those this doesn’t reap instant rewards and takes a rather long time to bear fruition. Some may invest their money in stocks and bonds, but with the agreement that their investments carry significant risks. Some may take a more elaborate path and engage in business, whether alone or with others.
When undergoing the second and third options, it’s best to think of strategies for them. Stocks and bonds don’t earn themselves, holders have the responsibility of buying selling them at the correct times and at the correct interest agreements. Business engagements on the other hand, involve plenty of decisive factors such as location, mass opinion, talents, and the marketability of an idea.
Written by admin on March 26th, 2008 with no comments.
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The term fixed income risk management is loaded with several concepts. Fixed income refers to a steady stream of money coming in at a regular interval, while risk management is the process of facilitating risks involved in money or asset investments. For example, in any market, the conventional way of making money is to sell particular investments for a price higher than its buying price. The problem is, even with economic experts and several charts of market progression, there is still no telling how the future course of markets goes. Even for people with a knack for accurate guessing (with regards to predicting market trends), no investor can ever have a monopoly on beating the market odds consecutively.
The key to becoming a long-term successful investor as opposed to someone with a temporary good run is the attitude towards risk. Risk and the measure of controlling are key elements in making successful investment management. It is with risk control that investors find the means to survive or adapt to difficult times, and rise again when the tides turn. It ensures that investors will not lose everything,
The best kind of investment is one that generates a fixed income, ensuring that the investor gets money back regularly. This may come in the form of bonds. Bonds are one of the better, lower-risk forms of fixed income investments, as they are generally more stable than stocks, and thrive on the rising turns of the economy (whereas stocks thrive when the economy drops). Bonds minimize downside risks, and have set interest rates for that steady income.
Of course, bonds still carry a certain degree of risk, and that is where risk management comes in. Good investors are those who don’t avoid risk, and rather accept it as part of business. However, this doesn’t mean that they should ignore risk altogether, as all investments have the potential to dissolve quite quickly should things get awry. Effective risk management is not only knowing the risks, but also having the capacity to gauge and quantify it.
Written by admin on March 24th, 2008 with no comments.
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Investing money covers a rather broad scope, as investment can mean anywhere from purchasing a laptop to have an extremely useful device that eases the management of school life significantly, to putting your savings in a savings account in the bank, and to pooling your money together to start a business. Investment is the act of pooling together resources (money, property, etc) and using them as a means to create more money.
The most fundamental rule about investing in money is that you are using it in order to gain something more valuable than the original amount (more money, services, convenience, etc). If you put your money in a time deposit account, it will perhaps double in amount after fifteen years. If you put your money in buying a piece of equipment for your business, using that piece of equipment will improve productivity of the business, thus bringing in cash. If you choose to buy a car, you invest in time and convenience, because you’re saving both when traveling to places using a car, rather than using public transportation. If you choose to invest in stocks/bonds, you hold the risk of having interest rates falter or balloon, depending on the economy. If you choose to invest in a personal computer with high speed internet, you’re gaining access to computer programs, software, and access to the information gateway.
Investing money usually means getting more money back. Most money investments come in the form of business endeavors, bank accounts, pensions, and stocks/bonds. The fourth is the most active one of the lot, as the investor needs to be kept up to date with the current market trade in order to determine if his stock/bond is pulling in money or not.
Investing becomes steadily more complicated as we grow older, hitting its peak in our middle age, and finally winding down at the age of retirement. As kids, we would have piggy banks, when we start getting allowances, we have savings account; when we graduate from college and get payrolls, we have checking accounts; and when we finally delve into full-time working, we have investments ranging from insurance to stocks; when we get married and have children, we have education plans and health plans; and finally, when we reach retirement age, we reap the products of such investments (e.g. Pension, etc)
When investing money, there are several basic guidelines, regardless of what kind of investment you will make. Number one is, make goals for your investments. It won’t do to just put money somewhere and wait for it to grow on its own.
Second is, choose your money handler carefully. Whether it’s a bank or a firm, the right institution is the one that will help you meet your investment goals in the most efficient way possible.
Lastly, make diverse investments. A savings account is always necessary when embarking on a business investment, as business investments sometimes go wrong, and fallbacks are necessary.
Written by admin on March 19th, 2008 with no comments.
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Bond markets and stock markets are both forms of investment, though the way the operate are very different. Those who make bond investments are cautious investors, always looking out for suspect bonds and taking as little risk as possible. The bond market has significantly lower potential gain than the stock market, but the upshot is, they have lower potential losses. Furthermore, bonds would guarantee at least an interest payment, and some bonds are backed by the full credibility of the whole government, which thus make them virtually fail safe.
Stock markets on the other hand, are more prone to losses, have more risks, and are generally undertaken by people who feel lucky or optimistic. Stocks are more erratic, and are all about future growth and estimated earnings. Stocks, unlike bonds, can only be backed by CEOs, who are fallible unlike the government.
With this disparity, it’s quite normal for pro-bond and pro-stock people to have a disconnected view on their craft. However, when it comes down to it, both markets look at the economy the same way, in the sense that everything depends on it. If the economy is doing well, stock prices will go up, while the prices of bonds will fall. When the economy is suffering some trouble, the prices of bonds will rise and stocks will fall. Their successes are inversely proportional.
Despite their polarized success functionalities, stocks and bonds continue to be a permanent presence in the world of economics and finance, and a veritable source of income for those who thrive on investments.
Written by admin on March 19th, 2008 with no comments.
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There are a few different measures of corporate profitability and financial performance. The ratios used here, which are pretty much like the operational performance ratios, allow its users a better understanding of how well a company manages and uses its resources in creating profit and value for its shareholders.
A company’s long-term profitability is important for both the survivability of the company and for the benefit received by shareholders. These ratios are key to allowing users to foresee and anticipate valuable profits.
There are four important profit margins, which show the amount of profit that one company is able to generate on its sales at the different stages of an income statement. It is also vital to know how to calculate the effective tax rate of a company. The effectiveness of a company at generating income from its own resources may also be detected with three ratios, which are Return on Assets, Return on Equity, and Return on Capital Employed.
Written by admin on March 19th, 2008 with no comments.
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There are four levels of profit or profit margins in an income statement. These four are called gross profit, operating profit, pretax profit, and net profit. The term “margin” can be applied to a give profit level’s absolute number. The same can be applied to the number as a percentage of net sales/revenues. The profit margin analysis uses the percentage calculation in order to give a detailed measure of the profitability of a company with regards to its 3-5 year history and when compared to similar companies and other standard-bearers of the industry.
Generally, it is the amount of profit, either at the gross, operating, pretax, or net income level, that is generated by the company as a percent of the sales that it generates. Margin analysis aims to pinpoint consistency or positive and negative trends in a company’s generated earnings. Positive profit margin is also allows for positive investment quality. To a broader extent, it is the earnings of a company’s quality and growth that determines its stock price.
Written by admin on March 19th, 2008 with no comments.
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The cash ratio is used to indicate the liquidity of a company, further refining both the current ration and the quick ratio. This is possible through the measurement of the amount of cash, cash equivalents, or invested funds that are there in current assets to cover current liabilities.
The cash ratio is considered the most rigorous and cautious of all the three short-term liquidity ratios. The cash ratio also only checks which are the most liquid short-term assets of the company. These short-term assets are the ones that are easiest to use as payments for one’s current obligations. It also overlooks inventory and receivables, which is intentional as there is no assurance that both accounts can be easily converted to cash during instances where it matters and when situations arise where there is a need to meet current liabilities.
Not a lot of companies are able to give out enough cash and cash equivalents in order to be able to fully handle current liabilities. This is not always a negative, however, so do not focus on this ratio being above 1:1.
Financial reports rarely use the cash ratio system, and also rarely used too by analysts in a company’s fundamental analysis. It is not really possible for a company to intentionally maintain very high levels of cash assets to cover their current liabilities. This is due to the fact that it is often interpreted as poor asset utilization for one company to keep large amounts of cash on its balance sheet, as the money could come back to shareholders or even used somewhere else in order to create higher returns. The cash ratio’s flexibility to be utilized is quite limited, although it does provide an interesting view on liquidity.
Written by admin on March 14th, 2008 with no comments.
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Bond Convexity are highly technical terms in the world with finance, usually involving the use of calculus applications in order to determine accurate values. By definition, convexity is the measure of the sensitivity of the duration of a bond to changes in interest rates.
Explaining how convexity is computed is much more difficult. The duration of a bond is measured by the first derivative of how bond prices change in response to interest rate changes. When interest rates change, the bond price is not inclined to change in linear fashion, and will instead change over a curved function of interest rates. Note that the more curved a price function of a particular bond is, the more inaccurate the duration is as a measure of interest rate sensitivity.
Convexity on the other hand, is the measure of the curvature or the 2nd derivative of how bond prices vary with their interest rates. In the interest of simplicity, we assume that the interest rate is a constant across the bond’s life, and that the changes that take place always occur evenly. As such, the duration can be used in the convexity formula as a first derivative of the price function of the bond in conjunction to the given interest rate. As such, the convexity would then be the second derivative of the price function with respect to the interest rate.
Bond convexities operate on a slightly different level than normal convexities. In the case of bond convexities, the price sensitivity to parallel the interest rate shifts is at its highest with a zero-coupon bond, and lowest with an amortizing bond. Both types of bonds have different sensitivities at the same maturity but if the final maturities differ so that they result to identical bond durations, then the will have similar sensitivities. In simple words, both their prices will be affected by small, first order and parallel yield curve shifts.
However, this set up changes when incremental parallel rate shifts due to different payment dates occur. For example, two bonds with the same par value, same coupon and same maturity convexity will probably differ depending on where on the price yield curve they are located.
A high rating could account for less convexity and less gain from risk-return strategies, and also less price-volatility, and ultimately, less return. In straight and forward terms, higher convex portfolio also has higher risk content.
Written by admin on March 13th, 2008 with no comments.
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A treasury bond is generally defined as a government bond issued by the U.S. Department of Treasury and released through the Bureau of Public Debt. They are marketable, fixed-interest debt security/ financing instruments with a maturity of more than 10 years. Usually, treasury bonds make interest payments on a semi-annual basis, and the income that the bond holders receive is taxable only on the federal level. They are often referred to as T-bonds or long bonds.
Treasury bonds belongs to one of the four categories of Treasury securities, the others being treasury bills, treasury notes and treasury inflation protected securities. Like the rest of the treasury securities, a treasury bond is very liquid and is a favorite trade on the secondary market.
Treasury bonds have the longest maturity among other kinds of bonds, usually stretching from 10 to 30 years. They operate on a coupon payment system semi-annual, similar to treasury notes, and are commonly issued with a 30 year maturity. Since the secondary market is very liquid, the yield of most recent T-bonds are commonly employed as proxy for long-term interest rates as a whole. However, this role has been more or less taken over by the 10-year note, due to the fact that size and frequency of long-term bond issues have met significant decline during the 1990s and early 2000s.
A minimum denomination of $1,000 must be issued when using treasury bonds. These bonds are usually sold via an auction, where the maximum purchase amount is $5 million, provided that the bid was non-competitive. If the bid was competitive, then 35% of the offering is issued. Competitive bids denote the rate with which the bidder is willing to accept the bond, and it will be accepted depending on how that particular bond compares to the set rate. A non-competitive bid on the other hand, makes sure that the bidder will get the bond, but he must be agree to settle on the set rate. After the auction has taken place, the bonds are usually sold in the secondary markets.
Written by admin on March 12th, 2008 with no comments.
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