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Archive for the ‘Government Bonds’ Category

If you are a regular investor in bonds, you will definitely have known by now that there are some bonds that do not actually give out any payments as interest. These bonds pay interest only on the maturity of the instrument instead of regular payouts like other bonds. Hence, they are called as Zero Coupon Bonds. In every zero coupon bond, interest is accrued annually. This accruing of interest is necessary, because conventionally, the annual increase in the value of the zero coupon bonds in question are reported as interest earned.

Zero Coupon Bonds – Interest Accrual

The procedure to record accrued interest on all zero coupon bonds is to record in a normal way all the bond interest that is accrued. What this means is that the amount that shows up as accrued amount, which is the same amount that appear in the statement issued by the broker, should be recorded as income from bond interest. As the interest from bond that is being accrued is recorded, what needs to be recorded additionally is the return of capital transaction of the accrued interest, that is ploughed back to constitute increase in the value of the bond. Obviously, the amount cited under this capital transaction should equal the amount of accrued interest. However, this accounting practice has a catch – you have to record the return of capital amount as a negative value. An example will make things clearer – if you’re zero coupon bond has $100 value of interest accrued, the recorded return of capital transaction of the bond should be shown as -$100.

When you record the return of capital transaction, what you are doing is that you are in effect transferring the money earned from bond interest from the cash account and adding it back to the value of the bond. Through this accounting practice, the cash account shows cash balance that tallies with the zero coupon bond’s cost basis. The cash basis for zero coupon bonds is the original purchase price of the bond and the added interest that have been accrued till date.

Zero Coupon Bonds – Creditworthiness

When a person buys treasury coupons from the government, what he essentially does is that he loans money to the US government. The government issues bonds that guarantee the security of the loaned amount. Zero coupon treasury bonds are called zeros for short are like other treasury bonds and hence have the full faith and creditworthiness of the US government to back it. Another name for zero coupon treasury bonds is STRIPS. STRIPs are an acronym that stands for Separate Trading of Registered Interest and Principal of Securities. Zero coupon bonds are not considered as good investment instrument, because of the multiple interest rate fluctuation risks associated with them, the fact that there is no periodic interest payout coupled with the unfavorable income tax regulations.

Securities are a financial investment regulated by the government. Examples include: government securities, stocks, bonds, and mutual funds. As a general guide to investing, to avoid heavy losses and investor fraud steer clear of more complicated securities and schemes. Here’s a guide to investing for beginners to help you start investing and avoid being fleeced.

The new investor is often nervous about making a financial investment because you don’t see or get anything tangible when you write out your check. It’s not like buying real estate or silver bars. On top of that, just the other day another financial scam was uncovered in Florida. A lawyer and associates bilked $1 billion from unsuspecting investors, selling a financial investment that didn’t even exist.

No wonder investing for beginners is scary business. You can get cheated through fraud, scams and schemes. Or you can lose your nest egg in legal securities where the new investor does not belong. Here are some tips for self defense… where not to invest when you start investing.

As a general guide to investing, walk away from anyone who gives you the HARD SELL promising high returns with little risk. Run if they pressure you to make a decision on the spot. Do not buy a financial investment from anyone who is not licensed through the National Association of Securities Dealers (NASD). The smoothest operators lead you to believe that their investment opportunity is not available to just anyone, and that you need to act now. They often lack a securities license, and are not offering a registered security.

Some legal securities are complicated and involve a high degree of risk. Examples include stock options, futures contracts, leveraged and inverse ETFs, and derivatives in general. The new investor should stick with listed stocks and bonds that are publicly traded on exchanges; and money market or government securities.

In fact, I’ll take that last statement one step further. Investing for beginners should focus on mutual funds that invest in stocks, bonds, and the money market. That’s the best way to start investing and avoid being fleeced. Mutual funds are a financial investment that is heavily regulated, and anyone who sells them directly to the public needs a license to do so.

A registered rep with a license might sell you a poor performing fund, but if he cheats you and gets caught he’s in a world of hurt. The NASD frowns on investor fraud; they are there to protect you.

Depending on what type of bond you are investing in, could make you earn a lot. There are varieties of bonds available in the market such as Mortgage Broker Bonds, Surety Bonds, etc. Short term low return bonds are a safer way of investing your hard earned money, Companies and Government Issue bonds to meet their day to day operation. When you are investing in a bond, you are loaning your money for an assured period of time to the issuer. In return the bond holder will pay you interest on your investment.

Many “savers” want liquidity or fast admittance to their money without penalty. Bonds provide a pleasing saving or investment vehicle for many reasons. ICC broker bonds are definitely safer than stocks because if you hold bonds until the maturity date, you don’t risk your principle plus, bonds give you regular income as interest. The investor may think on the fluctuations on interest rate, but if you hold the bond till the maturity fluctuation on your investing does not matter.

One of the disadvantage of real estate investing in bonds is diversification is hard to achieve unless investing in bonds mutual funds. The Advantages of investing in bonds are bonds pay higher interest rates than savings accounts and bonds usually offer a relatively safe return of principal. The other advantages real estate includes bonds often have less instability than stocks, especially short-term bonds, bonds offer regular income, and bonds are sold in small dollar amounts. Somebody recommends investing in bonds in countries like Britain, which are vigilant about increase, stable, and pay higher yields (5Percent+) than U.S.A bonds.

Government bonds are other wise known as “sovereign” debt. Government bonds are rated high then companies bond, this is simply government are trusted more and they default less than companies. You may buy bonds (gilts) through post office and stock broker also. If you don’t like investing in bonds directly, you may also choose from a wide range of bonds by investment companies. You can buy bond funds investing in different types of bonds, including investment grade, high defer and overseas bonds. Some funds also specialize in investing in budding market bonds.

I’m 10 years old and sitting at the kitchen table with my grandfather. I remember it like it was yesterday. He was reading the paper and I kept asking him questions about the stock market. I must have been on my 3,000th question when he told me something shocking. At least to my 10 year old brain…

You could loan money to people, and they’d give you more money back.

It was a very simple concept, learning about interest. But I was blown away at the time. My mind raced with thoughts of making lots of money. That’s how my first introduction to bond investing went. Loan out money, get more money back.

Over the years I’ve learned a great deal about investing from my grandfather. He’s explained stocks, bonds, commodities, even real estate. I remember the discussion about bonds most clearly.

Right now many high-yield bond investors are feeling the same way I felt then… excited and happy!

Last week, High Yield Corporate Bond funds received the largest inflow of cash in many years – $882 million in all. This is on top of the $690 million and $731 million invested during the last two weeks of December.

That’s a lot of money being put to work.

Why are investor dollars flowing into these funds at such a high rate?

Before we get to that… let me tell you a little bit about high yield bonds.

High yield bonds are bonds with a great PR (public relations) firm. You may know these bonds by their less flattering name – Junk Bonds.

High yield or junk bonds are typically issued by companies with a credit rating below “BB.” Their stated interest rates are usually three or four percentage points higher than those of government bonds. Why the higher rate?

Because they have a higher risk of default.

Most high yield bonds are issued for one of two reasons – general corporate purposes or to fund an acquisition. In the 1980s the junk bond industry became famous for financing the leveraged buyout boom. Today the high yield industry has issued more than $600 billion in bonds and has offerings from nearly every industry.

So what’s so special about these bonds? Why is all this money flowing into high yield bond funds now?

I’ve got one word for you – YIELD.

Right now a 10-year U.S. Treasury Note (T-Note) is yielding about 2.3%.

High yield bonds normally provide 4 or 5 percentage points of yield over T-Notes. That’s known as the spread. Today the Merrill Lynch High Yield 100 has a yield of more than 12%, a spread of more than 10 percentage points over T-Notes.

That’s more than double the normal spread.

But that’s nothing. Earlier this year the yield was over 17% – that’s a spread of almost 15%.

The spread’s a great indicator of fear. The bigger the spread, the bigger the fear companies will be going bankrupt. Clearly the market was very, very fearful when yields were 17%. Now yields are falling and the spread is tightening… a good sign the markets are returning to normal.

The opportunity to grab part of these big yields is quickly slipping away. As investors on the sideline become disgruntled with government bonds only paying 2%, it won’t be long before they’re looking for something with a better return.

Now there is a risk. Some of these companies could go bankrupt rendering their bonds worthless. Investors might lose a chunk of their hard earned money… to some that’s a risk worth taking.

If you want to buy into these funds you might look at a high yield bond mutual fund. According to Morningstar there are more than 150 to choose from. I know Vanguard has the High-Yield Corporate Fund (VWEHX), or you might look at the Fidelity Capital & Income Fund (FAGIX).

There’s an ETF you can trade as well.

One I like is the iShares iBoxx High Yield Corporate Bond (HYG). It boasts heavy trading volume and a 12% yield. With assets just under $1 billion, they’re not as big as the mutual funds, but big enough to provide some decent diversification.

Take a close look if you want to add a high yielder to your portfolio.

I will be the first person to tell you that investing in the stock market is really really hard. Many speculators will have you believe that investing can be easy; that you can just push a few buttons on your computer to pick a few stocks and make a bunch of money, but I think we both know better than that!

Some people think that investing in bonds is a safer bet than investing in the stock market; and for the most part, they are right. But there are some traps that you can get sucked into, especially in the municipal bond market and that is exactly what I want to talk about in this article today.

Someone once told me that there is no such thing as a really bad bond… as long as you find one at the right price! I suppose that’s probably true, but it begs the question… what is the right price?

Investing in municipal bonds can be tricky because it is often hard to determine what the correct price should be. Generally speaking I find that bond valuations confuse the heck out of the average investor because unless you’ve taken an advanced finance or economics class in bond pricing, then the math may be beyond you.

What is so enticing about municipal bonds is that many municipalities offer relatively high tax exempt yields and so you really should have some of them in your investment portfolio no matter what.

But don’t get lulled into a false sense of security, as these types of bonds have significantly higher risk than your regular money market account even though they are simply stodgy old bonds. As far as risks go, they are much riskier than regular US government bonds because US bonds are backed by the full faith and credit of the United States Treasury whereas municipal bonds aren’t backed up by much of anything. And yes municipalities do go bankrupt all the time so you have to be careful.

Here are some other risks that are involved that you may not have thought about for munis.

The first risk is the same risk that all bonds hold, and that is the interest rate risk. With bonds, when interest rates rise – the market value of the bond falls because bonds have an inverse relation between yield and price. When price goes up, the yield goes down, and when the yield goes up price goes down.

The next risk is default, as I already mentioned. Yes it is true that defaults are not very common… but the fact remains the same, defaults can and do happen especially in times of recession like we are currently in right now in 2010.

Finally, many brokers simply don’t specialize in municipal bonds and may steer you the wrong way. Check to see if your stockbroker has a specific musical bond department and if so only deal with them. If they don’t, consider finding a firm that specializes in municipal bonds just for that portion of your portfolio.

Yes, there are risks in municipal bonds but the tax advantages and the higher yields will usually outweigh those risks. As with any investment opportunity, be sure to do your homework before you make an investment decision.

Financial instruments found in the debt market include:

1. Term Deposits
2. Government bonds
3. Treasury Bills (T-Bills)
4. Money Market Funds
5. Corporate Bonds and Debentures
6. Domestic Bond Funds.

In this article, we will only discuss the term deposits, government bonds, treasury bills and money market fund.

1. Term Deposits

Term Deposits are qualifying instruments for tax shelter and will share the following characteristics.

a) Short-Term Deposit: less than 1 year
b) Long-Term Deposit: to 5 years. Interest Rate: depends on length of deposit and competitive interest rates available in the marketplace.

Long-term investments are called Guaranteed Investment Certificates (GICs) and can be purchased for a lesser amount such as $500. They are also called a Certificate of Deposit (CD). Rates may vary as little as 0.10% amongst the deposit takers.

Term Deposits may be cashed prior to maturity, but this may incur a penalty. GICs generally cannot be cashed before they mature, although some deposit takers are now more flexible.

2. Government saving bonds

Country residency is required and guaranteed by the country of issuer.

a) Are registered bonds that provide protection against loss, theft or destruction.
b) Are not transferable.
c) Can be purchased for a minimum of $100 to a maximum of $500,000.
d)The interest is taxable and is competitive with GICs.
e) Mature in 10 to 12 years.

In Canada, Canadian saving bonds are issued as either R bonds or C bonds.
In US, US saving bonds are issued as series EE bonds, Series I Bonds.
The investment risk for government savings bonds Issued by Canadian government or US government is nil, since the bond is guaranteed by the federal government.

3) Treasury bills (T bill)

Treasury bills are a short term money market instrument and issued by the federal government in terms of 30, 60, 91, 182 and 364 days. They are sold by auction.

Banks and investment houses buy at wholesale in multiples of $5 million denominations. They then sell these T-Bills to brokers and investment dealers who break down their purchases into $1,000 lots.

T bills are sold discount to their face values and also sold on the secondary market and their value fluctuates depending on competitive interest rates at the times of resell.

The short-term nature of T-Bills does not cause a large exposure to interest rate risk, but to some extent there is an inflation risk.If a T-Bill is sold before maturity, any gain is taxed as interest.

4. Money market funds

Money market fund holds T bills and other short term money market contracts. Investors pool the investments through the mutual fund. Units in this fund can be bought and sold daily. Money market funds produce capital gains although their primary function is to generate interest income. Interest is generally paid monthly, while capital gains are paid annually.

The benefits of money market funds include

a) security of principal
b) liquidity.
c) eligible for plan registration

I hope this information will help. If you need more information, you can read the complete series of the above subject at my home page: