Business and Finance

Posts Tagged ‘Municipal Bonds’

You may be thinking about investing your money into bonds. These are viewed as being less risky than the share market, as companies or governments guarantee them. Government bonds are seen to be the most secure of all bonds, as it is more likely that a corporation could go bankrupt before the government. When you take out a bond, you are actually loaning money to that organization or government entity and they will pay back to you your initial investment plus the additional money you earn for lending them your money. Make sure that you consider what is the best investment for you situation.

Treasury bonds are possibly the most common bonds you have heard about. These are in the news a lot as the Uncle Sam is raising money to bail out the economy from the recent financial crisis. These are long term so you need to be prepared to invest your money, most likely for more than 10 years. This type of investment is viewed as one of the safest that you can make. These bonds are sometimes called T-Bonds. Similar to treasury bonds are agency bonds. Agency bonds are issued by U.S. Government agencies. These bonds are not viewed as being as safe as treasury bonds are. Although these are backed by the U.S. Government they are not guaranteed by the U.S. Government, unlike the treasury ones which are guaranteed. Another type of these are municipal bonds. These bonds are issued by state, local or city governments to raise funds to provide services to the community. These services include roads, schools, community centers and many more. The good thing about these bonds is that are generally exempt from taxes on the interest they earn and your investment is providing worthwhile services to the community. These investments are secure, possible to the same extend that the agency ones are.

Corporate bonds are issued by private companies to raise cash. These bonds are not as safe as the government ones, so they will normally offer higher returns to make them more attractive to invest in. The zero-coupon bonds offer no interest (or coupons). You may think well why would you invest in these? The reason is that these are sold at a significant discount to what they are valued at. This means when they mature you get the value price when you sell them not what you paid for them, which can mean a huge profit to you. The final type is very well known, it is the junk bond. This is known for giving higher returns or losing all you money, hence the name junk. This type is only those who are willing to take the high risk of losing everything, with the chance to get high returns instead.

Corporate bonds are IOUs issued by private and public corporations to raise capital. Corporate bond promises to pay back your entire principal amount along with interest. They offer higher interests than government or municipal bonds.

Anyone in need of corporate bonds can seek the guidance of corporate bond brokers. Corporate bond brokers are experts who assist people in finding corporate bonds that best fit their needs. They act as agents in buying and selling corporate bonds. To be active in trading bonds, brokers have to pass an exam and have to register with the National Association of Securities Dealers (NASD). By keeping in touch with different bond dealers, corporate bond brokers help their clients to find the best prices for their bonds.

With the guidance of a licensed or registered bond broker, buyers and sellers can easily find a corporate bond with a lower rating and good rate of return. In exchange for their service, they receive commission from their customers. Instead of charging commission, certain brokers make money by increasing the markup value of bonds. The markup value and commission vary greatly depending on the size of the transaction and the type of bond you trading.

Certain brokers work with bond firms while some others work as individual brokers. All of them offer different levels of service and provide immediate access to the type of bond that you are interested in. Cantor Fitzgerald is one of the leading companies in the U.S that specializes in bond trading.

One has to consider several factors while choosing corporate bond brokers. Prior to seeking guidance of corporate bond brokers, it is important to make sure that they have proven their success in corporate bond trading. Make sure that they have education, experience, and necessary credentials for corporate bond trading.

Invest in bonds on the stock market as they are a safe investment with a steady amount of profit. This could be good advice for someone who likes to use a low risk strategy.

When you are considering entering the stock market with bonds, it is advisable to find out a bit more about them.

Here are the 4 main bond types:-

* our national government offers them
* offered by corporations
* government at a local or state level
* governments overseas

Your original investment amount is protected with these bonds, unlike normal stock market shares.

So anyone just starting out with online stock market trading will feel a lot safer. So will people who are low risk investors.

The 4 types are:-

Treasury bonds are on the market from the United States Government Treasury.
These bonds can be for a short term of three months or a long term of thirty years or any length of time in between.
Treasury Notes (T-Notes) and Treasury Bills (T-Bills) are instances of these. These are the most safe investment of the lot as they are backed by the central banks in conjunction with the U.S. Government.
The downside of them though is that the return tends to be low. Another good bit is that you only have to pay taxes on the interest portion.

Corporate Bonds are on offer from the Securities market.
They are offered basically when a corporation wants to pass on its debt.
They offer a bit better interest rate so are a medium risk investment. The risk is that the company offering them will go belly up.

State or local government bonds.
They work more or less the same as corporate bonds. Problems at state or local level are more frequent which makes them a bigger risk than national government bonds.
There is not tax whatsoever on them. That is their great plus. The interest is free of tax. Except maybe a small bit at state level. This makes these municipal bonds an attractive investment.

The rarest are overseas bonds.
The common way to have them is via a an investment in a mutual fund. These should only be considered by a person with a much higher risk strategy. The economies of foreign countries are out of our hands. We have no control over them whatsoever.

You can take out another bond when yours reaches its maturity date.

Finally to reiterate, when you want to invest in bonds, national government ones are safest and foreign government ones are the most risky.

There’s a school of thought among some in the real estate investing community that a certain target market of potential private investors is so lush and fertile that you should spend most of your time marketing your opportunity to them. The same school of thought goes on to emphasize that this same target market can provide you all the private money you need and in short order. Who am I talking about? Who is this potentially untapped pool of private investor dollars?

CD (certificate of deposit) owners.

But, should you spend a great deal of time marketing your real estate investment opportunity to owners of CD’s?

First, let’s look at the nature of a CD. A CD is an FDIC insured bank time deposit. This is one of the ways a bank borrows money. The bank takes the money in and pays an interest rate for a set period of time. The bank then loans that money out at a higher interest rate than they pay the CD holder and – voila – banking 101.

By their very nature, Bank CD’s are zero risk (FDIC insured up to $250,000 now) and carry lower interest rates compared to other fixed income investments (government bonds, municipal bonds, annuities). There’s also a little stipulation that comes with opening up a CD which says that you’ll pay a penalty if you take the money out before the CD matures.

Some of the clues are starting to unfold, but let’s dig deeper…CD owners, by their nature, are going to fall into two primary classes:

those that have the majority of their liquid capital in CDs (seniors)

those that own CD’s as a small allocation of their overall investment portfolio

Most of the people that have a boatload of money stacked away in CDs are in the highly risk averse senior demographic. Quite rare is the case where a 45 year old husband and father of 2 has $100,000 tucked away in a CD. The seniors (age 65+) have worked and saved and pinched pennies throughout most of their lives to build their cash horde. They like CD’s because they get at least some interest and they don’t have to think about it at all. It’s pretty easy for a banker to talk a 74 year old lady with $200,000 liquid into throwing a pile of that money in a 2 year CD. What’s nice about CDs for senior investors is that they are highly predictable and lend themselves well to estate planning.

The second category of CD owners have some of their money there as a portfolio allocation. It is part of their asset balancing or the preferred place to keep their rainy-day reserve money.CD’s are a small piece of their investments – they have stocks, mutual funds, bonds and perhaps some real estate holdings in addition to owning their primary residence.

Now, taking what we just discussed into consideration, are CD owners a good shot for marketing your opportunity to?

Let’s see if they fit the profile of “able, willing and ready” – my litmus test for proper investor targeting.

Able – are CD owners able to invest funds with you? Most likely ‘yes’ they are. This test is passed because we’re assuming that there is at least $100,000 in a CD.

Willing – is the CD owner willing to invest? While it’s tough to say without talking to them one-on-one, the evidence (and my experience) has shown willingness to be low for the senior demographic. Why move from a safe, federally insured investment into something that they have never heard of before? If they won’t invest in stocks or mutual funds, then a private placement in real estate is going to be tough to explain. Even a mortgage investment with you isn’t as easy for them to comprehend. A good rule of thumb is: if your investors cannot explain back to you in simple terms what they are investing in, it is better to pass on their investment dollars. You don’t want to deal with redemptions 1 or two years down the line. Family members also play a role here as well as SEC regulations (more on that later).

The other part of ‘willing’ that is going to blow it for the CD owner is their time frame. You should not be eager to take money from people for your real estate investments unless they are comfortable committing funds for at least a 3-5 year term. Why? What if your project is going to cash out in 6 months? Simple: it’s the principle of it. If the investor is not fiscally sound enough to commit funds to you for the 3-5 year time frame, then other factors could arise and impede their investment with you. Your best investor can commit funds and will be happy with the returns building for a while.

The other big reason is that you want to use the investors funds for a while – even if the first project cashes out after 6 months, you want to keep rolling those funds forward and using them again and again to create wealth for yourself and the investor. Why spend all the time and effort up front to win the investor just to never see them again after 6 months or a year? Your goal should be to have long term funding relationships and to leverage referrals and word of mouth from your investor base so that you get more and more private money.

I’m going to say that the “willing” test has not been passed. Let’s move on to the third test…

Ready – is the CD owner ready to invest with you? Since they’ve got their money tied up for a specified time, my guess is ‘no’. The CD owner would have to at least wait until the CD matured to place funds with you. Perhaps you could get away with covering their penalty or if they had a CD maturing soon, in which case they may be ready. Generally, though, CD funds are either stashed away to be in the ‘low risk’ part of the investors psyche or the low risk part of their portfolio. You won’t have much success tapping into ‘rainy day money’ or ‘junior’s college fund’ money. The investor already has these funds earmarked to be in a low risk and predictable investment. Trying to change their mind isn’t a good idea. In fact, it’s never a good idea to try to change someone’s mind when marketing anything. The question shouldn’t be: “should I invest?” The question should be: “should I invest with you?” Big difference.

Ready test is not met.

Here are the results of the: “Able, Willing and Ready” test:

Able – Pass

Willing – Fail

Ready – Fail

1 out of 3 really isn’t going to cut it. Seems like the conventional wisdom has been turned on it’s head once again.

I know I’m begging the question: “who should you target as a private investor?”This is a big answer, but the short version is: already invested funds. The best source of private money for you is going to come from people that already have money invested in vehicles like: stocks, bonds, mutual funds, annuities, 401(k)s and others. For the private investor, it’s a much easier position to ‘re-allocate’ their portfolio than it is to re-think their investment approach. CD owners are not going to be your #1 target.

Smart targeting + Smart time allocation = Private Money.