Your Questions About Investing In Bonds

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Daniel asks…

How does one actually LOSE money off of investing in T Bills/Bonds?

I am thinking of starting my own T Bill ladder and was warned many times that one would have to be cautious investing in T Bill’s because one could lose their money, however articles and blogs never really specify how (besides the initial investment), Does anybody actually know how you could actually LOSE money?

Justin answers:

With both T Bills, bonds, and long term CD’s, you sign on for a fixed interest rate. If you have to sell any of it before the term is up, and if the interest you are earning is less than current interest rates on similar products at the time you want to sell, your investment is worth less and you couldn’t find a buyer for your $10,000 bond which pays 2% when he could buy a $10,000 which produces 5%. So your bond would have less value to a buyer, and you might sell, but for less money than you paid for it. (He might offer $7500 because he could get more than twice the interest from a different bond.)

Chris asks…

Can a company choose not to pay the interest on bonds that they issue?

I’m considering investing in bonds, issued as subordinated debt by a company. While I doubt that the company will ever go bust, is it possible for it to choose not to pay the interest on a bond, as opposed to simply defaulting?

Justin answers:

Deciding not to pay interest on a bond is absolutely defaulting. On YA there is this misperception that “default” = “debt repudiation”. That’s just not the case. If you miss an interest payment on a bond, you are in default on that bond. That means that the bond becomes immediately due and payable. Since missing an interest payment puts you in bankruptcy, the company will not pay interest on any bonds (and if they did, the bankruptcy court in the US would require that receivers of the coupon payment give it back in a clawback since that was unauthorized preferential treatment of a creditor). That means all the bonds are due and payable.

The “subordinated” part is only important for determining your recovery rate in a bankruptcy.

Robert asks…

I’m thinking of investing in bonds. Is Pioneer Strategic a good choice?

Justin answers:

It is ok for a bond fund but if you invest in the A shares, you need to realize there is a front end load of 4.5%. There are a couple of other things you need to be aware of. There are no load funds that have similar yields and returns such as Fidelity Strategic Income. It has no load and a slightly lower expense ratio about 0.3% lower. It does however have a higher minimum investment amount $2500 vs $1000 if that is a consideration. Another thing to be aware of is that a bond fund such as these might be appealing for their current returns but long term they are not too appealing. If inflation heats up they can be disasterous.

Paul asks…

i need to know about bonds! investing in them??? help?

im soon about to turn 18 and start working and im thinking of saving money to buy a bond, im thinking if i buyt a bond for 20 thousand dollars,, wat happens after tht wat do i get!? people tell me the money doubles and u cant lose in bonds at all? any expert advice? gimme ur e-mail if you know about bonds i would like to chat! thnx!
can someone answer my question??? thts not what im askin lol!

Justin answers:

Bonds are one step above putting your money in a savings account….lucky if you keep pace with inflation/taxes……like Cramer says there is always a bull market out there in the global stock markets…..one of the easiet ways is just following the trend ie Latin America FLATX, Natural Resources RIO, Agriculture POT, Gold GLD, oil USO, at the same time when markets have been dropping you can short them SDS, DUG, DOG, etc… I became a millionaire investing in stocks for 15 years and never invested in bonds…..you want to know how, read The Successful Investor by William O’Neal

Donald asks…

Which online trading tool is best for investing in stocks and bonds?

I would like to start trading and investing but I don’t know which company should I open the trading account with. Can someone tell me which one of the following is the best? and why?
E-trade
Scottrade
TDAmeritrade
Fidelity

Thanks!

Justin answers:

All major brokerage firms provide their clients with on-line services, including trading platforms, latest market & financial news and research.

Customer need to select the site that is best for them. Traders have requirements in a site, while investors have other requirements.

Although most sites are geared to general securities and commodities, however customers may have special needs for the types of products they trade, and the markets in which they trade. For example I use Fidelity for investing. Scottrade for equities trading and ThinkorSwim for option trading

It seems that the most popular firms for on-line investing/trading all of which provide excellent platforms and services are; Scottrade; Chas.Schwab; TDAmeritrade; Fidelity; E-Trade and Thinkorswim. In your situation, you may be best served if you select Fidelity or Ameritrade since they provide more products and services for investing rather than trading

Joseph asks…

Ginnie Mae bonds invest program and the federal government?

Explain the Ginnie Mae bonds invest program with the federal government and how it works. What are the minimum requirements to be involved in the program and other factors involved?

Justin answers:

What Is a Ginnie Mae?

The Government National Mortgage Association (GNMA) operates as an agency of the U.S. Department of Housing and Urban Development.

It buys home mortgages from the financial institutions that made these loans and groups them into pools of $1 million or more. Ginnie Mae either keeps these pools to sell directly to investors or sells the pools to mortgage bankers and other institutions, which market them to investors.

Ginnie Mae or the mortgage banker continues to collect mortgage payments from the homeowners in each pool, and when you invest in a Ginnie Mae, you usually receive a monthly payment that includes both interest and a portion of the outstanding principal. Alternatively, you may receive monthly payments including only interest, and then receive the principal back when the mortgage matures.

These government agency bonds are also sometimes called Ginnie Mae pass-through securities, since the mortgage payments pass through a bank, which takes a fee before passing the remainder of the payments to investors.

Besides providing a higher return than Treasury notes and having the U.S. Government’s backing against default, Ginnie Maes have another advantage: they are highly liquid and can be resold on the secondary market.

The minimum investment for a Ginnie Mae is generally $25,000. Thereafter, the securities are available in increments of $1. Of course, you sometimes can buy Ginnie Maes that are selling for less than $25,000 at a discount on the secondary market, if their interest rates are low compared to more recent issues or if their principals have been substantially reduced. Finally, you can purchase shares in Ginnie Mae mutual funds for less than $25,000. Ginnie Mae funds or investment trusts buy these government agency bonds and offer shares to the public.

In addition to individual investors, a wide variety of organizations buy Ginnie Maes–for example, retirement pension funds, credit unions, real estate investment trusts, commercial banks, insurance companies, and corporations. Likewise, many different types of institutions issue Ginnie Maes–including mortgage companies, banks, and credit unions. Ginnie Maes are readily available and easy to add to your portfolio.

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