Home | Finance
With a plethora of ways to analyze bonds, it might make your head spin. Even so, evaluating the potential risk before you buy and calculating your potential returns is an essential step in the process of acquiring bonds. 1. Evaluate All Potential Risks You should pay attention to all the details - interest rates, inflation, how easy it is to sell that particular bond, you name it. 2. Credit Risks It doesn't matter what kind of bond you choose to invest in, there is always a credit risk. In 1995, U.S. Treasuries, considered the gold standard of bonds were close to default for the first time in history. For corporate and municipals the risks are even greater, running everywhere from the AAAAaa to B and below. These are often called junk bonds. 3. Bond Evaluation Checklist - What is your earning potential? - What is the current earnings per share? - What is a typical dividend payment? - What is the outstanding debt? - What foreseeable technological changes might affect this bond? - What is the track record of management? 4. Dividends As debt loads grow, the amount of interest paid increases, reducing the amount for such investments as well as bringing a company closer to default on existing debt, since only so much can be sustained by current revenues. 5. Interest Rates A large number of bond issues have maturities with 5-30 year periods. Any change in the prevailing interest rates affects unmatured bonds in two ways. A rise in rates depresses the price for those considering selling prior to maturity, since investors can get a better rate with a new instrument. Also, the pressure to sell rises, since the bondholder can himself get a higher rate with a new instrument. The longer he holds the older one, the more opportunity costs he incurs. 7. Dealing With Inflation Inflation is the enemy of bonds. It will significantly reduce your return on any bond. Even ignoring tax issues, an 8% bond in a 4% inflation environment is worth half its coupon value. Historically, inflation tends to increase more than it decreases. When it does decrease the general economy tends to suffer, worsening returns for all investments. Know the rate of inflation and the market conditions before you invest. If you do decide to to go with a bond, first of all, expect to pay a minimum of $5,000. You will definitely want to invest in a bond that is rated AA or higher, and stick to a well known, major brokerage to handle your investment. Even with inflation you can expect to make only 4% profit per year. Of course, 4% of $5,000 is only $200, but over a period of 10 years that turns into $2,000. Of course, in today's economy $2,000 won't even last a month for rent, food, utilities, etc. Even so, bonds have many advantages. Since they have a set interest rate and maturity date, their behavior is much more readily predictable, given plausible assumptions about interest rate changes and other economic factors. You can't attribute this kind of reliability to stocks, for example.
Information and Articles: http://www.mastersmba.com
Providing Information on various topics, please browse our other Articles for more informative resources, we house information on every topic imaginable so regardless of your needs you can be assured to find the answer here. If you wish to reprint this on your own website, simply click the "Web Version" in the right menu, and you are presented with a pre-formatted document to use.
A lot of the information is written by the Master Article team, and published exclusively on the MastersMBA.com website, and we do our best to research all information to ensure it's as accurate as possible. However at times we also publish documents given to us by other sources, we do examine these documents to ensure they are as accurate and correct as possible however at times they discuss highly specialized fields making it hard to authenticate the validity of every fact in the document. These are written by specialists in their respective fields, and we do trust their integrity and judgment however it's always a good idea when doing any research to consult a number of sources and form your own conclusion based on a number of view points.
Some of this weeks most popular categories are: Finance - Health - Business - Credit Loans and Acne
