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129

Neither. What you appear to have purchased is a zero coupon bond. In under 10 1/2 years, your $10,677 will grow to $15,000. This is a compound 3.3% per year. To be clear, the return comes from the fact that you paid less than the $15000 face value that you will get at maturity, only you do not receive interest along the way. By the way, no offense ...


103

No, what it says is “In half a year, we’ll give whoever holds this bond $10,000 for which you pay us $9,750 now”. This is equivalent to an annual interest rate of about 5% (the example is showing a yield way more than currently available). Plus you can sell the bond to another person in the meantime.


66

Why is an American birth certificate on bond paper? Because it is an important document which needs to survive for a whole human lifetime. So it gets printed on paper which is thicker and of a higher quality than usual photocopier paper. This style of paper is traditionally called "bond paper" because it was often used for bond certificates when physical ...


60

"Can't declare bankruptcy" isn't the same as "can't default". Bankruptcy is a specific legal process for discharging or restructuring debts. If Illinois can't declare bankruptcy, that means it will still owe you the money for the bonds no matter what, but it doesn't guarantee that it will actually pay you what it owes. If Illinois should run out of money ...


58

Why? Because the two are unrelated. "Inflation rate" is calculated by measuring changes in the consumer price index (CPI). Your personal consumption may not match the CPI and the inflation you experience is likely quite different than what the CPI indicates. A great example of this is "rents". If rents increase, but you own your own home, does that ...


57

They are not necessarily a scam, or even likely to be. There is a reason they didn't just borrow the money at 5% though and this is virtually certain to be because they are higher risk. There was a recent question along these lines which I unfortunately cannot find. A number of points were raised. The investment is higher risk Your bank may not be ...


45

It doesn't necessarily have to be a scam. The most likely scenario is that the issuer of the 12% bonds is higher risk, so you have to take that into consideration in your calculations. If you borrow money from a bank at a 5% rate, lend it to someone else at a 12% rate, what happens if they default and don't pay you back? The same concept applies to credit ...


41

Since it sounds like you are just starting out in bonds, let me first tell you a little about how bonds work before moving on to answering your actual question. Whereas stocks represent a portion of ownership of a company, a bond (somewhat simplified) represents a portion of a company or state loan. Effectively, when you buy the bond, you are extending a ...


38

You are referring to a specific conspiracy theory called the "redemption movement" involving the United States government, bankruptcy, and Jewish bankers. Of course, there is no truth to this theory. (Thanks, @trashpanda, for the link in the comments.) Your birth certificate is not redeemable for money from either the United States government or any ...


36

If Illinois cannot go bankruptcy This is missing a few, very important words, "...under current law." The United States changed the law so as to allow Puerto Rico to go into a form of bankruptcy. So you cannot rely on a lack of legal support for bankruptcy to protect any bond investments you might make in Illinois. It is entirely possible for the ...


34

One reason that a bond can be significantly less than face value is because people are seeking better investments elsewhere, so for example if a bond doesn't mature for another 10 years, that 20% increase in face value isn't very attractive when compared to say leaving your money in the stock market for 10 years. Another reason could be that the credit-...


27

WilliamKF explained it pretty well, but I want to put it in a more simplistic form: Stock : You own certain part of the company. The value of the stock derives from the value of the company. Bond : You lend money to the company. Company owes you money, but you don't own a part in it. The value of the bond derives from the current rates, remaining payments ...


24

No, they are not recession proof. Assume several companies, that issued bonds in the fund, go bankrupt. Those bonds could be worthless, they could miss principle payments, or they could be restructured. All would mean a decline in value. When the economy shrinks (which is what a recession is) how does the Fed respond? By lowering interest rates. This ...


24

TL;DR: Cash is king — and bonds are not cash. I've written about this in this other answer. Here's part of it: [...] inflation aside, why do we want our "equivalent to cash" position to be relatively liquid and principal-protected? When it comes time to rebalance your portfolio after disastrous equity and/or bond returns, you've got in ...


24

Short-term bonds might pay more interest, but only for a short time. When they mature, overall interest rates available for reinvestment are likely to be lower in this scenario. (Long-term rates are based largely on expectations of future short-term rates.) By investing in long-term bonds, you lock in a rate that you see as still relatively high, and express ...


24

You're contemplating paying 30,000 lira ($5000 US or 4400 EUR) today for bonds with a face value of 37,500 lira. If Turkey doesn't go bankrupt, in one year the bonds will pay out 37,500 lira. If you had 37,500 lira today, that would be worth $6175 US or 5500 EUR. But you won't have 37,500 lira at today's exchange rate, you'll have it at next year's ...


23

The link to an article about the original bet Joe Strazzere pointed to answers this question quite clearly. It's between Buffett (not Berkshire) and Protégé (the firm, not its funds). And there's serious money at stake. Each side put up roughly $320,000. The total funds of about $640,000 were used to buy a zero-coupon Treasury bond that will be worth $1 ...


23

You keep money in a savings account so that you know you can access it at any point, and that it will always be there. It is diversification of risk. If you have the money in equities instead, you can access it relatively quickly in this day and age, but it may not be there when you need it. The common example is losing your job during a recession. If ...


21

Plenty of other people have mentioned that the bond issuer might be a bigger risk. That's a possibility, but there are other factors -- probably more important factors -- in play as well. First, consider the size of the loans involved. Your bank is probably offering to loan you...maybe ten grand, unsecured, at 5%? Probably not more than 100k at the most. ...


19

Wow. It's clear I'm outnumbered. When I'm approached with the question (and keep in mind, it's usually a couple data points and little else) "I am getting started, with no other money do I fund a retirement or emergency account?" I often suggest they put the funds into a Roth, in a money market fund, and treat it like an emergency account. If there's in ...


17

There are a few things you need to keep in mind: the coupon is based on the par value of 100 but the bond is currently trading at 102. At 102 the yield to maturity is 2.5%, not 6.25% the coupon and yield to maturity are annual rates, so over a holding period of ca. 6 months you are only going to make half that, i.e. 1.2% and, most importantly, you will ...


17

Welcome Wapiti! Treasury Bills (T-bills) does seem like an oddball but it might work for some folks. I'm going to address it both your questions individually as interest and liquidity. 1) Interest Looking at the Department of Treasury's site for rates (https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=...


16

1. Interest rates What you should know is that the longer the "term" of a bond fund, the more it will be affected by interest rates. So a short-term bond fund will not be subject to large gains or losses due to rate changes, an intermediate-term bond fund will be subject to moderate gains or losses, and a long-term bond fund will be subject to the largest ...


16

You need to have them consult with a financial adviser that has a focus on issues for seniors. This is because they are beyond the saving for retirement phase and are now in the making-their-money-last phase. They also have issues related to health insurance, IRA RMDs, long term care insurance. The adviser will need to review what they have and determine ...


16

Well, first of all, you're adjusting the bond for inflation, but you're not adjusting the rate that banks give for inflation. Second, it doesn't make sense to adjust money for 30 years of inflation unless you're getting it 30 years from now. It's a bit unclear what you mean by "return". You're likely referring to the coupon amount, which is an amount of ...


15

Bonds are interesting and you've come across most of what makes them so interesting. The interesting thing with bonds, is all the already outstanding notes of similar remaining duration and underwriting risk are revalued to the newest yields. The "why" will shake out like every single other investment decision. Does this make sense for my portfolio? I'm ...


14

You’ve really got three or four questions going here… and it’s clear that a gap in understanding one component of how bonds work (pricing) is having a ripple effect across the other facets of your question. The reality is that everybody’s answers so far touch on various pieces of your general question, but maybe I can help by integrating. So, let’s start by ...


14

Having cash and bonds in your portfolio isn't just about balancing out the risk and volatility inherent in equities. Consider: If you are 100% invested in equities and the market declines by 30%, you'll be hard pressed to come up with additional money to "buy low". You'll miss out on the rebalancing bonus. But, if you make a point of keeping some portion of ...


14

Dheer is correct in the general case (and probably all Private Equity cases), however, there are a few exceptions: Buyers can offer to "assume" the liabilities of the acquired company in exchange for a lower purchase price. In that case, the debt is transferred to the acquiring company Individual bonds may have "change of control" clauses that allow ...


13

This directly relates to the ideas behind the yield curve. For a detailed explanation of the yield curve, see the linked answer that Joe and I wrote; in short, the yield curve is a plot of the yield on Treasury securities against their maturities. If short-term Treasuries are paying higher yields than long-term debt, the yield curve has a negative slope. ...


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