Your Questions About Investing In Bonds

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Paul asks…

Do you think investing in corporate bonds is a good, or the best, way to increase income?

Over the last few years, investors have been forced to look for ways to squeeze additional income from their investment portfolios. Do you think investing in corporate bonds is a good, or the best, way to increase income? Why or why not?

Justin answers:

Bonds of any kind at this point in time are a poor choice.
The return is very low and hardly keeping pace with inflation.
Once interest rates begin to rise, bonds will begin to lose
value. Best you look into the stock market or mutual funds
for better returns.

Richard asks…

what is the relationship between interest rates and inflation?

And what would be the implications for someone thinking about investing in Bonds?

Justin answers:

Interest rates and bond values move inversely. Think of a playground see-saw. Interest rates rise, and existing bond values fall. Inflation is something that has and will cause the federal reserve to raise short-term interest rates, which causes existing bond prices to fall. If you are investing in bonds for the income they generate (regular interest payments from the issuer), then you’ll be OK. If you’re investing in bonds with the intention of selling them later for a gain, you may not be successful. Of course, even the experts are really bad at predicting interest rate moves, so don’t try to predict the future too much. If you buy individual bonds, pay attention to quality and consider building a bond ladder. If you are working with a smaller amount of cash, consider bond funds. Also, be sure to balance this investment with some equity (stock) investments to give you diversification. Good luck!

William asks…

Which back in currently the best for saving money?

Also does anyone have any info about investing in bonds and all of that? Which bank is the best for that?

Thanks!

Justin answers:

For savings, you are almost always better off with a building society than a bank. The exact account that’s best depends on how long you want to tie up the money for and whether it’s a lump sum or regular saving. You used to get a good rate on 4 year bonds from the Skipton but they change month to month. Not sure if they’re the sort of bonds you mean or if you mean government bonds. Think for that sort of thing you’d need to talk to a proper financial adviser.

Charles asks…

How long would it take to turn half a million into 5 million?

On average, using investing, CDs, bonds, whatever.

Justin answers:

On average, using investing, CDs, bonds, whatever.

There IS no average. The RATE of return is crucial, and will vary 10 fold from the options you list. At 12% APR, a 10 fold return would require 20 to 21 years. At 4% the time frame is 33 to 34 years.

Ken asks…

Can banks invest FDIC insured deposits in investment grade bonds?

Can banks invest FDIC insured deposits in investment grade bonds? If so, are there any restrictions on the percentage of deposits that can be invested in bonds?

Justin answers:

Banks take all FDIC insured deposits and use that money to invest in a variety of things which may include securities, bonds, etc, however their most profitable investments is by loaning that money back out in the form of credit cards, where cardholders guarantee to pay them 12-30%+ a year return.

Other investments include loans such as residential and commercial mortgages, which has not worked out too well.

Donald asks…

How would I do this: Suppose that you received an unexpected inheritance of $36,000. You have decided to?

invest the money by placing some of the money in stocks and some in bonds. To diversify, you decided that five times the amount in bonds should equal three times the amount invested in stocks. How much should be invested in stocks? How much should be invested in bonds?

Justin answers:

Let s = the amount of money to be invested in stocks
Let b = the amount of money to be invested in bonds

You plan to invest all the of the money you have unexpectedly received, so s + b = 36000

Also, since “five times the amount in bonds should equal three times the amount invested in stocks” That means 5b = 3s

Now you have two independent equations

s + b = 36000
5b = 3s

re-arranged a bit for convenience these might look like

s + b = 36000
-3s + 5b = 0

Now multiply both sides of the first equation by 3 giving

3s + 3b = 108000
-3s + 5b = 0

Add the two equations giving

0s + 8b = 108000

solve for b giving

b = 13500

Now substitute this numerical value for b into one of the original equations giving

s + 13500 = 36000

solve for s giving

s = 22500

So, $22,500 should be invested in stocks and $13,500 should be invested in bonds.

Check:

22500 + 13500 = 36000
5(13500) = 3(22500)

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