80

assuming the currency value with respect to USD stays stable in that year. This is where your analysis breaks down. The fact that the foreign bond pays a higher interest rate indicates that the currency will weaken relative to the dollar over the year, otherwise many investors would buy these bonds as an arbitrage opportunity, driving the price up (and ...


58

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 ...


47

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 ...


32

Because currency risk is not the only risk in this scenario. The risk of the developing country (the state) not servicing their obligations are the bigger risk, hence the very high interest rates. Think of it as investing in High Yield bonds (junk bonds) - interest is high because risk is high. Rating agencies rate countries (like they do corporations) for ...


23

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

The other answers are correct, but I would like to explain the problem from a different perspective: When some scheme seems to offer you free money for nothing, then you should always ask yourself why someone offers you that scheme. Why would a foreign government offer you to give them a loan with a high interest rate when they could just as well give you a ...


18

Consider staying in your "starter home". It's a luxury to live beneath your means, and makes all the other items on your wish list that much easier to achieve. A $200k home with just an $80k mortgage and a $500 monthly payment is something to be proud of! Instead, maybe redecorate a little bit. Some new paint and carpet will make it feel like a new home and ...


15

Well, sort of. The quoted price in the secondary market is for the bond itself, but when you buy the bond you pay that price plus accrued interest. So the closer you are to the payment date, the higher the total cost.


14

Unlike Stocks or ETFs where there is a hard cutoff of dividend ("Ex-Dividend"), the buyer of the Bonds has to pay "Accrued Interest" to the seller if the Bonds were purchased between two payment dates. The Accrued Interest is prorated calculation is accurate to 1 day.


12

You can get a loan at 5%, can they get a loan at 5%? Probably not or they would be getting a loan, or selling a bond at 5%. Borrowing cost reflect credit worthiness, so they probably have some financial issues that make their borrowing cost higher. Government debt is usually considered the safest kind of debt in a given country, so it usually has the ...


11

"I'd like to move into a nicer home" and "little hope of ever being able to work again" don't reconcile. Assuming you are on a fixed income, hopefully with COLA (cost of living adjustments), I'd suggest doing all you can to reduce expenses, including not dropping $40K on a larger house. That number is larger than your total savings, and would make you ...


10

Make sure that you are comparing apples to apples. 12% over two years or 12% annually. 5% yearly over two years is (1.05)² -1 = 10.25% ~= 12% The difference between 12% and 10.25% may be due to the risk of investing in the company bonds. Also double check any commisions, fares and risks on your side both in the loan and the bond. Also. Is this bond in the ...


9

Basically, the easiest way to do this is to chart out the "what-ifs". Applying the amortization formula (see here) using the numbers you supplied and a little guesswork, I calculated an interest rate of 3.75% (which is good) and that you've already made 17 semi-monthly payments (8 and a half months' worth) of $680.04, out of a 30-year, 720-payment loan term....


9

Possible reasons I can think of: You are a central bank. Your goal is to inject liquidity into the system by buying bonds, and you don't care about low or even negative returns. Your bond buying program drives yields lower by design. You are a bank who wants to safely park some money, but you are discouraged from depositing more than your reserve ...


8

In the academic sense, an annuity is payable annually for a term of years and a perpetuity is payable annually forever. An annuity has an end date and a perpetuity does not. Many commonly seen annuities are structured to pay until death of the recipient, which for the issuer can be averaged and anticipated using actuarial tables (i.e. the anticipated ...


8

Bond ETFs are just another way to buy a bond mutual fund. An ETF lets you trade mutual fund shares the way you trade stocks, in small share-size increments. The content of this answer applies equally to both stock and bond funds. Feature Mutual Fund ETF __________ ____________ ...


8

The question seems to be whether you can benefit from the (normally) higher yield of a longer-term bond but limit your risk by buying it close to maturity. The answer is you cannot, because you have to buy the bond at market price, which is based on the current market interest rate associated with the remaining term. Thus, your yield will be different from ...


8

No, you are not quite correct. Assume you have a simple bond that costs you $100. There are 2 ways the bond provides you money: It might provide you with interest every month/quarter/year, or it might provide you with a future repayment of, say $105. Either way, this bond would be considered 'fixed income' because the value you receive is not based on ...


7

IANAL While I'm not a lawyer, I am fairly decent at researching information, so I hope that some of this information may be of some use to your situation. First, you say that you have your RRSP with some funds, but you're not adding anything to it. This is a very important service, and you should be taking advantage of it, since you have some extra money ...


7

GMA would call back the notes provided they are able to find alternative funds at cheaper rates. Yes you are right the interest rates are at all time low ... however not one would lend me a Billion dollars, people have to trust me that I would be able to return the funds ... even if I am willing to pay 50% interest per annum, I would not get the funds ... ...


7

"Dist" is short for "Distributing" and means that income from the underlying instruments is distributed to holders of the ETF every so often. For bond funds this income would be interest or "coupons" on the bonds, and for equity funds the income would be dividends, but either way the end result is the same. The alternative, "Acc" ("Accumulating") means that ...


6

I wrote about this a while back, and it boils down to risk profile. If you hold the bond to maturity, then you minimize your capital risk: if you bought a $1,000 bond, once it matures, you are guaranteed the capital back (i.e., your $1,000). However, with a bond ETF, because the ETF is made up of underlying bonds, if interest rates go up, the aggregate ...


6

Since the bond interest rate is 12%, there's a good chance - say 1 in 10, just to make the numbers simple - that the borrower will default on it. So if I loan $1 million, there's a 1 in 10 chance that I'll lose the entire sum. OTOH, if I buy $100K worth of 12% bonds from 10 different companies, and 1 defaults, I've still made $80K profit from the other 9....


6

I doubt it, since CDs are FDIC insured and mainly target retail savers/investors. More sophisticated investors have bond options, interest rate options, caps/floors, and other interest rate derivatives to choose from, as well as bespoke structured products.


6

You can't actually get the savings rate, because it isn't currently a running business or bank. It is an early stage startup (i.e., a business pitch), they are trying to collect email addresses for a wait list. This is a very typical strategy for dot-com startups now a days, and honestly I've seen pages like this given as an assignment for students where ...


5

It would be preferable to purchase a bond with a negative yield if the negative yield was the smallest compared to similar financial securities. The purchase or sale of a security is rarely a mutually exclusive event. An individual may have personal reasons or a desire to contribute to the activity the bond is financing. To an entity, the negative yield ...


5

But what's not clear is if those payments are always just the payments from the previous half of the year or if they pay out coupons as soon as they come in. I.e. do they pay out everything they get as soon as the next monthly dividend date comes round? It's not clear because the prospectus does not specify exactly how the dividend is calculated, only that ...


5

I am in a somewhat similar situation. I am in my 60's with all bases covered - no debt, health insurance covered, fully paid long term care insurance, two variable annuities covering all of my living expenses as well as sufficient assets to cover whatever time I have left. Like you, my risk appetite has diminished. I have reached the point where ...


5

The 10 year is actually called a note. And a new series is actioned off every month. The quoted 10 year rate reflects the most recent note’s quotes. A 20 year instrument with 10 years left might have a slightly different YTM, as its duration (which directly affects price movement based on interest rate movement) will be different given the different ...


5

For the same reason that some investors buy long-term bonds when the yield curve is inverted but positive: They expect that short-term rates will decline enough to make locking in the current long-term rate a good deal. Negative rates can't be very far below zero, because they compete with holding physical currency. But they can exist because currency does ...


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