What are Bonds? Bonds are a type of "debt instrument" frequently issued by corporations and governments. Typically they have a "par value" of 100 (or 1000). Par value, aka. "nominal value" is the face value of a bond. However, bonds can trade at a premium or discount to face value but at the end of its term, the borrower (i.e. government or corporation) must pay the lender (i.e. investor, aka. creditors or debtholders) the face value. During the term of the loan, the borrower makes interest payments to the lender based on the face value and the listed interest rate (aka. coupon rate). Bonds can be issues for fairly long terms i.e. 20 or 30 years so interest rates can change drastically … [Read more...]
Inflation Risk
What is Inflation Risk? Inflation Risk aka. "Purchasing Power Risk" is the risk due to "a decrease in purchasing power of assets or cash flow" due to inflation. A typical example would be a bond that generates a fixed rate of return. For instance, suppose this bond is worth $1000 and generates a 5% yield i.e. $50. Suppose when you purchase the bond that $50 will buy two tanks of gas for your car. Over time inflation will reduce the purchasing power of that $50 so it only buys one tank of gas. If you are counting on using the proceeds of the bond to buy gas there is an "inflation risk" that eventually you will not be covered. The worst-case example of inflation risk is if a country … [Read more...]
Worried About Inflation – Consider Inflation Indexed Bonds
Inflation-Indexed Bonds (aka i-Bond)- Although inflation is currently low it is still a key concern for investors, because with interest rates at record lows and the FED promising to keep them there for the foreseeable future even a small uptick in inflation can prevent an investor from achieving a real return on investment, as returns on investment fail to beat inflation rates. If a return on investment fails to beat inflation, then in real terms you have not earned any money. You may have a larger figure for your total net worth, but in terms of purchasing power this will earn you less as the costs of living increased at a higher rate. On target Inflation is currently tracking at … [Read more...]
Should I Invest in Inflation Indexed Bonds?
The question of "Should You Invest in Inflation Indexed Bonds?" depends on your personal situation and the current inflationary environment. If you want to have a low risk investment that will keep up with inflation you might consider investing in inflation indexed bonds. Inflation Indexed Bonds When Inflation Rates are High, you might be worried about what's going to happen to your savings. Inflation series bonds are one option to consider. These unique investments have the ability to fight inflation and protect your savings from total devastation. Types of Inflation Indexed Bonds There are two different types of inflation indexed bonds issued by the U.S. Treasury one is called the … [Read more...]
What are I bonds?
I- Bonds: A brief overview: In the current shaky economy, everyone is looking for safe and secure investments. Investors might have a chance at high rewards with stocks and corporate bonds, but there’s also a huge risk to putting money in either. The snowballing crises in Europe aren’t making foreign investments look any more tempting. Where can investors trust their finances if they want a solid risk free return on their investment? Well, for those of you who want to play it cool and safe with your investments, you might consider: I bonds. What are I-Bonds? First of all, I-Bonds are officially called Series I Savings Bonds. According to the U.S. Department of Treasury, I bonds … [Read more...]
