lazarus@sunybcs.UUCP (Daniel G. Winkowski) (03/14/85)
Being a novice at investments, I am seeking advice on long term (10 to 20 years), relatively low risc investments. Perferably, they should have a low capital entry level (<= 1000). I read somewhere about a type of long term bond, that for a ~$50 purchase would mature in 20 (10?) years to $1000. - suggestions are welcomed -- Today we live in the future, Tomorrow we'll live for the moment, But, pray we never live in the past. -------------- Dan Winkowski @ SUNY Buffalo Computer Science (716-636-2879) UUCP: ..![bbncca,decvax,dual,rocksanne,watmath]!sunybcs!lazarus CSNET: lazarus@Buffalo.CSNET ARPA: lazarus%buffalo@CSNET-RELAY
bwm@ccice2.UUCP (Brad Miller) (03/15/85)
In article <1336@sunybcs.UUCP> lazarus@sunybcs.UUCP (Daniel G. Winkowski) writes: > > Being a novice at investments, I am seeking advice on long term >(10 to 20 years), relatively low risc investments. Perferably, they should >have a low capital entry level (<= 1000). I read somewhere about a type of >long term bond, that for a ~$50 purchase would mature in 20 (10?) years to >$1000. > - suggestions are welcomed >Dan Winkowski @ SUNY Buffalo Computer Science (716-636-2879) What you seem to be referring to is what is known as a zero-coupon bond, or a 'zero'. A 'normal' bond usually has 'coupons' which are redeemed periodically for the interest then due on the note. (If the coupon is redeemed late, you don't get any additional interest -- thus several banks and brokerages make money offering a coupon clipping service keeping this up for you). A zero does not have coupons, instead the interest is reinvested, and the original bond is discounted such that the FINAL MATURED value is equal to the face value of the bond. As an example, a zero maturing in 20 years with a market rate of 11% would cost you $11.75/$100 face value. Since bonds are only sold in multiples of $1000 face value, you would pay $117.50 for a $1000 bond. Note also that most brokers require a MINIMUM purchase of $5000 face value of bonds - in order to avoid it, you need to go to a broker that carries an inventory, such as Merril-Lynch, although they might not inventory the particular bond you want. One type of zero is known as a CAT, or Certificate of Accrual on Treasuries. Basically, this uses Treasury bonds to insure that the money you put in will be there in 20 years (or whatever the maturity you desire). This is probably the safest zero you can buy. Note that the longer the maturation date (or the higher the interest rate) of your zero, the less you must pay for it up front -- this is part of the wonder of compound interest! Some price examples: 6% 14years: $43.71/100 11% 15years: $20.06/100 14% 20years: $6.68/100 Some things to remember when buying zeros: They are a) relatively illiquid (they are hard to resell). b) they are VERY volitile. Minor interest rate changes can (because of the compounding over 20 years) change the current value of your bond significantly. Therefore, you are reccomended to only buy what you intend to hold to maturity. An example, suppose you bought a 20year 11% CAT today (hypothetical market value) for $5000 face value for $587.50. If interest rates on the CAT rose to 14% a year from now and you had to sell, you could only get $382.50 for it (ignoring commissions which are usually figured into the interest rate quoted by your broker). Thats a 35% loss!! All you are 'guaranteed' by the zero (and the guarentee is as good as with any bond, i.e. if you want to put down $5/1000 for a 40 year 16% zero, do you really expect the company or local government project to be there in 40 years) is that at maturity you can cash it in for the face value. Hope this helps. I have put some CATS into my IRA as it happens, both to guarantee an interest rate, leverage myself in case of a positive move on interest rates, and shelter that interest from current taxes, all for a minimum of 'cash on the line'. Brad Miller -- ..[cbrma, ccivax, ccicpg, rayssd, ritcv, rlgvax, rochester]!ccice5!ccice2!bwm
2212zap@mhuxm.UUCP (putnins) (03/19/85)
> In article <1336@sunybcs.UUCP> lazarus@sunybcs.UUCP (Daniel G. Winkowski) writes: > > > > Being a novice at investments, I am seeking advice on long term > >(10 to 20 years), relatively low risc investments. Perferably, they should > >have a low capital entry level (<= 1000). I read somewhere about a type of > >long term bond, that for a ~$50 purchase would mature in 20 (10?) years to > >$1000. > > - suggestions are welcomed > >Dan Winkowski @ SUNY Buffalo Computer Science (716-636-2879) > > What you seem to be referring to is what is known as a zero-coupon bond, or a > 'zero'. A 'normal' bond usually has 'coupons' which are redeemed periodically . . . > > Some things to remember when buying zeros: They are > a) relatively illiquid (they are hard to resell). > b) they are VERY volitile. Minor interest rate changes can (because of > the compounding over 20 years) change the current value of your bond > significantly. Therefore, you are reccomended to only buy what you intend > to hold to maturity. An example, suppose you bought a 20year 11% CAT today > (hypothetical market value) for $5000 face value for $587.50. If interest > rates on the CAT rose to 14% a year from now and you had to sell, you > could only get $382.50 for it (ignoring commissions which are usually figured > into the interest rate quoted by your broker). Thats a 35% loss!! All you > are 'guaranteed' by the zero (and the guarentee is as good as with any bond, > i.e. if you want to put down $5/1000 for a 40 year 16% zero, do you really > expect the company or local government project to be there in 40 years) is > that at maturity you can cash it in for the face value. > One additional thing to remember: Just like all other securities, brokers charge a commision on selling these bonds to you. Normal commissions on stocks are ~2-5%, depending on your transaction amount. For zeroes, I've seen commisions as large as 15%. If you translate this into a new effective interest rat (because you've spent more money for the same face value) you reduce a 12% rate to ~11.2, a 16% rate to 15%. ALternatively, brokers may charge on 3% commision, but they make their money on a "mark-up" on the price of the bond. They buy a bond for $100, mark it up to $110, charge you 3% "because their nice guys", and you wind up paying 13% over the market rate. The way to find out is toask the broker how much the firm payed for the bond. If he hesitates, go someplace else.
dgh@sun.uucp (David Hough) (03/20/85)
In article <610@ccice2.UUCP> bwm@ccice2.UUCP (Bradford W. Miller) writes: >Some things to remember when buying zeros: They are >a) relatively illiquid (they are hard to resell). >b) they are VERY volitile. Minor interest rate changes can (because of >the compounding over 20 years) change the current value of your bond >significantly. Therefore, you are reccomended to only buy what you intend >to hold to maturity. An example, suppose you bought a 20year 11% CAT today >(hypothetical market value) for $5000 face value for $587.50. If interest >rates on the CAT rose to 14% a year from now and you had to sell, you >could only get $382.50 for it (ignoring commissions which are usually figured >into the interest rate quoted by your broker). Thats a 35% loss!! All you >are 'guaranteed' by the zero (and the guarentee is as good as with any bond, >i.e. if you want to put down $5/1000 for a 40 year 16% zero, do you really >expect the company or local government project to be there in 40 years) is >that at maturity you can cash it in for the face value. > I have heard that the commissions, particularly at major brokerage houses, are outrageous on zeros, to the extent that the SEC is investigating. I would suggest buying them from a broker who will state the commission explicitly (rather than "net" prices) and preferably from one whose rates are fairly low. David Hough
bwm@ccice2.UUCP (Brad Miller) (03/20/85)
Some more info that I omitted from my original article: Tax considerations! Something that is VERY important about 0's based on Govenment obligations (i.e. not a tax-free muni 0) is that the IMPUTED interest (that is the interest you would have been receiving on the zero had it been paid to you) is taxable EACH YEAR. Now if you (like me) don't really feel like paying taxes on money that hasn't been paid to you, you will only use them for your IRA or KEOGH account. If, on the other hand you bought a tax-free muni 0, you won't have this problem, BUT you might fall into another VERY BIG hole: The issuing authority may call the bond!! Most muni (though I am told not all) 0's can be called early. The problem is, that they are called for the ORIGINAL ISSUING PRICE plus the interest thru the call date. SO, if you payed a premium above it's current value (like, the 'current' rate is better than the 'issue' rate) YOU COULD LOSE MONEY IF IT'S CALLED. The only way to avoid this is to a) buy uncallable muni 0s, b) make sure you are buying at a discount, so you will get a premium if it is called or c) buy at the end of a series, so your bond will be the LAST to be called, and thus less likely. Brad Miller -- ..[cbrma, ccivax, ccicpg, rayssd, ritcv, rlgvax, rochester]!ccice5!ccice2!bwm
shaprkg@sdcrdcf.UUCP (Bob Shapiro) (03/22/85)
In article <349@mhuxm.UUCP> 2212zap@mhuxm.UUCP (putnins) writes: >> In article <1336@sunybcs.UUCP> lazarus@sunybcs.UUCP (Daniel G. Winkowski) writes: >> > >> > Being a novice at investments, I am seeking advice on long term >> >(10 to 20 years), relatively low risc investments. Perferably, they should >> >have a low capital entry level (<= 1000). I read somewhere about a type of >> >long term bond, that for a ~$50 purchase would mature in 20 (10?) years to >> >$1000. >> > - suggestions are welcomed >> >Dan Winkowski @ SUNY Buffalo Computer Science (716-636-2879) >> >> What you seem to be referring to is what is known as a zero-coupon bond, or a >> 'zero'. A 'normal' bond usually has 'coupons' which are redeemed periodically > . > . > . >> >> Some things to remember when buying zeros: They are >> a) relatively illiquid (they are hard to resell). >> b) they are VERY volitile. Minor interest rate changes can (because of >> the compounding over 20 years) change the current value of your bond >> significantly. Therefore, you are reccomended to only buy what you intend >> to hold to maturity. An example, suppose you bought a 20year 11% CAT today >> (hypothetical market value) for $5000 face value for $587.50. If interest >> rates on the CAT rose to 14% a year from now and you had to sell, you >> could only get $382.50 for it (ignoring commissions which are usually figured >> into the interest rate quoted by your broker). Thats a 35% loss!! All you >> are 'guaranteed' by the zero (and the guarentee is as good as with any bond, >> i.e. if you want to put down $5/1000 for a 40 year 16% zero, do you really >> expect the company or local government project to be there in 40 years) is >> that at maturity you can cash it in for the face value. >> > One additional thing to remember: > Just like all other securities, brokers charge a commision on selling >these bonds to you. Normal commissions on stocks are ~2-5%, depending on your >transaction amount. For zeroes, I've seen commisions as large as 15%. If you >translate this into a new effective interest rat (because you've spent more >money for the same face value) you reduce a 12% rate to ~11.2, a 16% rate to >15%. ALternatively, brokers may charge on 3% commision, but they make their >money on a "mark-up" on the price of the bond. They buy a bond for $100, mark >it up to $110, charge you 3% "because their nice guys", and you wind up paying >13% over the market rate. The way to find out is toask the broker how much >the firm payed for the bond. If he hesitates, go someplace else. I don't know where you are buying your stocks and bonds but the rates you quote are out of sight. The only way you would pay 2-5% on stock commissions is if you make odd lot purchases and deal with a full service broker. Even a full service broker wouldn't charge that much for 100 share lots. As for bonds they typically sell from $5 to $10 a bond although I have occasionally seen brokers who charge as high as $15 a bond. There is usually a minimum such as $30 to $50 so once again small purchases are more expensive. Since zero-coupon bonds are discounted you are paying a higher percentage for commission per bond. e.g. A $1000 bond with a commission rate of $10 is a 1% rate but if it is zero coupon it might sell for $250 or a 4 per cent rate. I guess you would have to buy a single bond from a broker with a high minimum and the bond would have to have a very long maturity to ever get into a 15% rate. By the way $5000 bonds are treated like 5 $1000 bonds so the commission rate would be $50 if the broker charged $10 a bond. Since your bond would tend to increase in value as it neared maturity your broker's rate would tend to go down if you measure it as a per cent rate. If you want to buy bonds you should always buy enough bonds to cover the broker's minimum or you will take a beating. It is similar to the odd lot problem in stocks. I have had no problem finding both full service brokers and discount brokers who will sell me bonds at $5 a bond with a minimum typically of $25 to $30 dollars. As for stock you should not pay more than 1 to 2 per cent commission from a full service broker on 100 share lots of at least 25 dollars per share and if you buy 1000 share lots the commission should be closer to 1/2 of 1%. Discount brokers will be even cheaper, especially on the smaller purchases. If you can't afford to buy stocks and bonds in reasonable quantities you probably should invest in some other media like mutual funds.
john@hp-pcd.UUCP (john) (03/22/85)
<<<< Some things to watch out for with a Zero.... Although you don't see a penny of interest until maturity, the IRS will require you to pay taxes on the interest each year. This is why they are popular for IRA's since you can at least wait until you have the interest before giving it to the IRS. If you buy a normal bond for a project that goes bust in ten years you at least get interest for ten years. With a zero you get...ZERO.(is that where they got the name?). Hopefully there will be a way to recover the taxes you paid on the interest that you never got and now never will get. John Eaton !hplabs!hp-pcd!john
shaprkg@sdcrdcf.UUCP (Bob Shapiro) (03/22/85)
In article <614@ccice2.UUCP> bwm@ccice2.UUCP (Bradford W. Miller) writes: >Some more info that I omitted from my original article: > >Tax considerations! > >Something that is VERY important about 0's based on Govenment obligations >(i.e. not a tax-free muni 0) is that the IMPUTED interest (that is the >interest you would have been receiving on the zero had it been paid to you) >is taxable EACH YEAR. Now if you (like me) don't really feel like paying >taxes on money that hasn't been paid to you, you will only use them for >your IRA or KEOGH account. > >If, on the other hand you bought a tax-free muni 0, you won't have this >problem, BUT you might fall into another VERY BIG hole: > >The issuing authority may call the bond!! Most muni (though I am told not >all) 0's can be called early. The problem is, that they are called for the >ORIGINAL ISSUING PRICE plus the interest thru the call date. SO, if you >payed a premium above it's current value (like, the 'current' rate is >better than the 'issue' rate) YOU COULD LOSE MONEY IF IT'S CALLED. > >The only way to avoid this is to a) buy uncallable muni 0s, >b) make sure you are buying at a discount, so you will get a premium if >it is called or >c) buy at the end of a series, so your bond will be the LAST to be called, >and thus less likely. > >Brad Miller > >-- >..[cbrma, ccivax, ccicpg, rayssd, ritcv, rlgvax, rochester]!ccice5!ccice2!bwm On the other hand bonds that are callable and selling above par have been discounted by the general marketplace such that they tend to pay a higher interest premium. In addition since you are paying your broker a commission per bond you get more bang for the buck when you buy a bond above premium than below it. If you are talking about tax-free bonds you may have to pay capital gains tax on the profit and if you are using them for an IRA you may have a capital gains situation for your IRA. (An undesirable situation since the IRA treats all income the same and capital gains situations tend to be lower rates of returns because of their tax advantages). The bottom line is that there is no free lunch. If you want to eliminate risk of losing your principle than you must accept lower interest rates. The bond market is not a great deal different than the stock market. When you buy something you get some return as interest (almost the same as dividends for stock) and you get either a profit or loss on the principle depending on the general conditions of the bond market. The biggest difference is that bonds have a day of reckoning which stocks do not and bond interest is fixed for the life of the bond while stock dividends may be either raised or eliminated. In addition the factors that tend to control bond value are more related to the what an acceptable rate of return for that type of bond is at the current time rather than the more emotional issues that govern the stock market. The only strong case for buying bonds at a deep discount is for convertible bonds. Now if the bond takes off it has no high restriction but you can limit your loss on the low end. It is a little like buying stock except that you have a built in cushion on the low end when the interest rate of the bond becomes equal to that of a non-convertible bond which will slow its descent as opposed to the stock of the company. Obviously if the company goes under everybody loses both bond and stock holders but at least you get to stand in line in fron of the stock holders. I have made quite a bit of money buying bonds in this fashion. Smarter people than us have been playing the bond market and the forces that they generate tend to equalize all investments. What each individual has to do is look at his/her own situation and react accordingly. What may be right for you may be wrong for me. Long term, short term, liquidity, safety, are all issues and they are probably different for each of us.
chu@lasspvax.UUCP (Clare Chu) (03/25/85)
In article <> bwm@ccice2.UUCP (Bradford W. Miller) writes: > >One type of zero is known as a CAT, or Certificate of Accrual on Treasuries. >Basically, this uses Treasury bonds to insure that the money you put in will >be there in 20 years (or whatever the maturity you desire). This is probably >the safest zero you can buy. > >Note that the longer the maturation date (or the higher the interest rate) >of your zero, the less you must pay for it up front -- this is part of the >wonder of compound interest! Some price examples: > >6% 14years: $43.71/100 > >11% 15years: $20.06/100 > >14% 20years: $6.68/100 > >Some things to remember when buying zeros: They are >a) relatively illiquid (they are hard to resell). >b) they are VERY volitile. >i.e. if you want to put down $5/1000 for a 40 year 16% zero, do you really >expect the company or local government project to be there in 40 years) is >that at maturity you can cash it in for the face value. > c) sure you can cash it in for face value if it is backed by the Treasury, but in 40 years how much in real terms is $1000 worth? It might cost $1000 to eat lunch by then! I know most of you think inflation is licked, but you can never be too sure... Clare
davec@dciem.UUCP (Dave Cote) (03/27/85)
> In article <349@mhuxm.UUCP> 2212zap@mhuxm.UUCP (putnins) writes: > >> In article <1336@sunybcs.UUCP> lazarus@sunybcs.UUCP (Daniel G. Winkowski) writes: > >> > > >> > Being a novice at investments, I am seeking advice on long term > >> >(10 to 20 years), relatively low risc investments. Perferably, they should > >> >have a low capital entry level (<= 1000). I read somewhere about a type of > >> >long term bond, that for a ~$50 purchase would mature in 20 (10?) years to > >> >$1000. > >> > - suggestions are welcomed > >> >Dan Winkowski @ SUNY Buffalo Computer Science (716-636-2879) > >> > >> What you seem to be referring to is what is known as a zero-coupon bond, or a > >> 'zero'. A 'normal' bond usually has 'coupons' which are redeemed periodically > > . > > . > > . > >> > >> Some things to remember when buying zeros: They are > >> a) relatively illiquid (they are hard to resell). > >> b) they are VERY volitile. Minor interest rate changes can (because of > >> the compounding over 20 years) change the current value of your bond > >> significantly. Therefore, you are reccomended to only buy what you intend > >> to hold to maturity. An example, suppose you bought a 20year 11% CAT today > >> (hypothetical market value) for $5000 face value for $587.50. If interest > >> rates on the CAT rose to 14% a year from now and you had to sell, you > >> could only get $382.50 for it (ignoring commissions which are usually figured > >> into the interest rate quoted by your broker). Thats a 35% loss!! All you > >> are 'guaranteed' by the zero (and the guarentee is as good as with any bond, > >> i.e. if you want to put down $5/1000 for a 40 year 16% zero, do you really > >> expect the company or local government project to be there in 40 years) is > >> that at maturity you can cash it in for the face value. > >> > > One additional thing to remember: > > Just like all other securities, brokers charge a commision on selling > >these bonds to you. Normal commissions on stocks are ~2-5%, depending on your > >transaction amount. For zeroes, I've seen commisions as large as 15%. If you > >translate this into a new effective interest rat (because you've spent more > >money for the same face value) you reduce a 12% rate to ~11.2, a 16% rate to > >15%. ALternatively, brokers may charge on 3% commision, but they make their > >money on a "mark-up" on the price of the bond. They buy a bond for $100, mark > >it up to $110, charge you 3% "because their nice guys", and you wind up paying > >13% over the market rate. The way to find out is toask the broker how much > >the firm payed for the bond. If he hesitates, go someplace else. > > I don't know where you are buying your stocks and bonds but the rates you > quote are out of sight. The only way you would pay 2-5% on stock commissions > is if you make odd lot purchases and deal with a full service broker. Even > a full service broker wouldn't charge that much for 100 share lots. As for > bonds they typically sell from $5 to $10 a bond although I have occasionally > seen brokers who charge as high as $15 a bond. There is usually a minimum > such as $30 to $50 so once again small purchases are more expensive. Since > zero-coupon bonds are discounted you are paying a higher percentage for > commission per bond. e.g. A $1000 bond with a commission rate of $10 is a > 1% rate but if it is zero coupon it might sell for $250 or a 4 per cent rate. > I guess you would have to buy a single bond from a broker with a high minimum > and the bond would have to have a very long maturity to ever get into a 15% > rate. By the way $5000 bonds are treated like 5 $1000 bonds so the commission > rate would be $50 if the broker charged $10 a bond. Since your bond would tend > to increase in value as it neared maturity your broker's rate would tend to > go down if you measure it as a per cent rate. > > If you want to buy bonds you should always buy enough bonds to cover the > broker's minimum or you will take a beating. It is similar to the odd lot > problem in stocks. I have had no problem finding both full service brokers > and discount brokers who will sell me bonds at $5 a bond with a minimum > typically of $25 to $30 dollars. As for stock you should not pay more than > 1 to 2 per cent commission from a full service broker on 100 share lots > of at least 25 dollars per share and if you buy 1000 share lots the commission > should be closer to 1/2 of 1%. Discount brokers will be even cheaper, > especially on the smaller purchases. > > If you can't afford to buy stocks and bonds in reasonable quantities you > probably should invest in some other media like mutual funds. The March issue of Money gives the difference in commissions charged by various sources of zero coupon bonds. For a $1,000 zero maturing in 2003, the compounded annual returns ranged from 10.93 to 11.2% when taking into account the dealer's markup. That spread represents a $17.47 higher purchase price for the lowest-yielding bond. Quotes obtained were: * Shearson Lehman/American Express: price, $151.25; yield, 10.93% * Dain Bosworth: $144.50; 11% * Dean Witter: 139.26; 11.1% * Fidelity Brokerage: $133.78; 11.2% Hello Fidelity... Dave Cote utzoo!dciem!davec