Help---Question on Bonds

Discussion in 'Economics' started by riddler, Mar 3, 2010.

  1. riddler


    it is said NEVER to buy bonds in a rising interest rate environment. however,is that irrelevent if you hold til maturity or intend too?
    another question,if rates are rising,what kind of investments would be most logical (in general)?
    thank you guys
  2. Bonds are the worst investment right now. Even if you hold to maturity, inflation is sure to outpace the amount of interest you are getting meaning that when they do mature, your real buying power is less than if you just spent the money today.

    I'm a big fan of saving your money in silver & gold. In the last 10 years those are basically the only things that made money. The Dow hasnt made money in 10 years, real estate is about the same as it was 10 years ago. I think you might have made a TINY bit of money with bonds if you bought 10 years ago because i think the interest rates were higher, but after inflation, you didnt make that much. I think interest rates were 6% on 10 yr in 2000, so after 10 years if you started with $10k you end up with $17,755. Although what cost you $10k in 2000, costs you $12.7k today so you really only made about $3800 of buying power over 10 years and that was when interest rates were high.
  3. It is just a question about the yield. Regardless of what the interest rate is bond prices fluctuate to reflect the true market yield. Bond prices and interest rates are inversely correlated. Obviously if you are trying to speculate I suggest you go short on the bond as interest rate increase. However, If you seek a particular return (holding the bond until maturity) then the yield is irrelevant to you.

    The best bonds in my opinion are convertible bonds. Those you can quickly convert to stocks. It gives you more flexibility to obtain the highest return on your investment.
  4. riddler


    can you please explain how a convertible bond works and why its good especially in an interest rate environment? i looked it up but i'm still a tad bit confused.
  5. No problem: Let say you buy a bond at 1000 par value at 5% with a convertible clause of 5:1. Meaning your 1000 par value bond can give you 200 stocks. Currently the stock is selling for 4.50. THIS IS THE DATA.

    Now, if at the present market rate your bond has a value of 1000 but the conversion option only has a value of 900. Obviously you would not trade bond for stocks. But lets suppose two scenarios.


    Lets suppose (other things unchanged) that the stock value increases to 5.5. Now your stock option is worth 100 more than your bond holding. You can then trade bonds for stocks a make a risk less profit of 100.


    Lets suppose (other things unchanged) the interest rate increases to 6% and this reduces the bond value to 800. Since your bond now worth less than the stock convertible option if you are in the need of selling your assets the convertible option will give you an additional 100 for your assets.


    Hope this helps.
  6. riddler


    yes it does..when you say 200 stocks; you mean 22 shares?
  7. 200 shares...........................5:1 ratio.