Your Questions About Purpose Of Investing In Bonds

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Richard asks…

How long does it have to be before I can cash a savings bond?

I got a savings bond in the mail today and I need some stuff but don’t have the money. I would like the money from my 200 dollar bond.

Justin answers:

I think it’s 12 months from issue date, but if you redeem it before 5 years, you lose three months of interest.

Here’s a link to the US Treasury website with the detail on redeeming rules for EE bonds. Http://

That answers your question, but I’m going to give you more information that’s more important.
The short two sentences in your question are enough to show that you’re headed on the road to a difficult life full of financial struggles. The point of savings bonds is to use them as a way to save. (That’s why “savings” is in the name.) I assume this was a gift. You probably don’t realize it now, but I think the person that bought that for you did you a favor by giving you a bond instead of cash.

“I need some stuff so I’m going to cash in whatever I can to get it” is an attitude that typically leads to a lifelong shortage of money. Not only does saving and investing provide benefits because your saved/invested money earns you more money, but spending every penny the minute you get it leaves you with no money for things you really need (e.g. Rent, food) or unexpected expenses (e.g. Car breaks down) so you make costly financial mistakes (payday loans, pawn shops, credit card debt) to get what you need that dig your financial hole a little deeper every time you do it. And the deeper the hole gets, the harder it is to get out of it.

You’ll be way better off in life if you skip anything you don’t absolutely need (and buy the cheapest version of what you do need that accomplishes the purpose) so you can save some money. The way many rich people get rich is by doing this and accumulating money that they then use to make more money. The way people stay poor their entire life is by spending every penny they get as soon as they get it. It sounds like that’s the path you’re on. For your own sake, I hope you’ll use this savings bond (which you are forced to save for at least a year because it’s not redeemable) as the start of a savings program. If you do, you’ll be glad you did a few years down the road when your life is easier because you’re more financially secure.

Sorry for the lecture, but it pains me to see people setting themselves up for a difficult future because they don’t know they need to (or aren’t willing to) save.

Joseph asks…

Normally what is acceptable use for stock that investors invest through buying shares from a company?

Normal uses by the company when a company offers a pink sheet stock, establishes itself as in IPO, or otherwise offers stock to investors? What uses are acceptable for the funds that were invested as stock into the company?
Is there a legal limit or is there just a moral obligation?

Justin answers:

The usual statement is “for general corporate purposes”.

I don’t know what you mean by a moral obligation. This isn’t a bond. They aren’t going to pay you back no matter what.

George asks…

How to save capital gain tax on account of property sold today purchased 29 years back. I am working woman?

What is time frame to save capital gain tax either by way of deposit in bank or bonds. Upto which period sale proceeds have to be reinvested in housing. What is the best option. My husband who is retired already owns a house where in v r living.

Justin answers:

Section 54 – Long-term capital gains on sale of residential house invested in purchase/ construction of another residential house (subject to certain conditions and limits).

Section 54EC – Capital gains on transfer of long-term capital assets invested in specified assets (bonds).

From 1.4.2006, investment can be made only in notified bonds of NHAI and REC.

Section 54F – Capital gains on transfer of long-term capital asset other than residential house, invested in residential house, subject to certain conditions.

New house should be purchased within 1 year or constructed within 3 years.

You can open a Capital Gains Account Scheme in banks where it is available.
Deposit your capital gains in this account. You have to utilize this amount within 2 years for purchasing a house or within 3 years for constructing a house from the date of sale.
If this deposit is utilized for the specified purpose within the specified period then no advance tax is required to be paid on the gains.
The deposit in the CGAS has to be made by the investor before the last date of filing his ITR for the relevant year.

In case you do not wish to invest the gains in property, then the first day of paying advance tax is 15th of September.

David asks…

Is five years more than enough for my investment in mutual fund to realize profit?

I have just invested a minimum required amount in a money market mutual fund. I intend to leave it at that for a year or so. Is five years more than enough for my investment to grow? Is it advisable to add more to my investment in that mutual fund?

Justin answers:

Money market fund return is low compared to other investment vehicles like long term bonds, equity funds, stocks, cooperatives, and private preferred shares. The growth of your investment depends on the performance of the mutual fund so we cannot say if your goal will be reached in five years time.

You can add more to your investment in that mutual fund however, it would be best if you also try what I mentioned above for diversification purpose. And, practice dollar cost averaging.

Robert asks…

If a mutual fund’s purpose is capital appreciation, does the mutual fund manager sell and buy stock?


I understand that mutual funds pool money from different investors for a portfolio from which they only own a portion. But, what could be the possible sources of income from this investment? Interest from bonds and dividends from stock. But, when the stock increases/decreases in value, does the mutual fund manager just sell/buy at his/her discretion? Or the investor cannot see part of the potential money from selling stock if he himself doesn’t sell his portion of the portfolio?
So basically the mutual fund manager is in charge of everything, right? And can a person know what’s her/his exact portion of shares?
Thanks, ag31…, so it’s only when one, and not the manager, decides to sell their shares that one gains from capital appreciation. Otherwise, the gains only come from bond interest and stock dividends, if there are any.

Justin answers:

Add to other poster.
If you invest $5,000.00 in a mutual fund that has
a price of $10.00 a share. How many shares do
you get? 500 right. If the value of the shares go
up in price, you will have made money, but if the
share price goes down, you will lose money.
This will happen only if you sell the shares.

Chris asks…

Can I still buy GM stock even though they have filed bankruptcy? Will it still be the same stock?

They have a new stock symbol, GMGMQ, does anyone know the difference that makes? I am new to investing and have a friend who is putting money into GM hoping it will turn around, so I just thought I would see if anyone could explain this to me. Thanks!

Justin answers:

Sorry, but your friend is clueless.

Clearly they don’t understand at all what is going on.

The “Q” in the stock means the company is in bankruptcy. I am just so amazed how people don’t seem to understand what part of bankruptcy they don’t get.

Bankruptcy is a legal proceeding. The purpose of bankruptcy is to stop paying your bills that you cannot afford to pay.

Did you ever play Monopoly?

What happens when someone is in massive debt to another player?
Answer: They go bankrupt right?

The player who is owed the money, what do they get?
Answer: EVERYTHING that bankrupt player has.

How does that bankrupt player be able to play again?
Answer: They start the game over.

Do you get to keep what you had from the last game and start that in a new game?
Answer: No

Bankrupt player (GM shareholder): Do not pass Go, Do not collect $200… Or in this case, do not collect new stock.

GM is giving everything to “the other players” — its creditors (US gov, Canada gov, UAW and bondholders). Stockholders are not creditors, they own equity which there is no equity in GM left to give to them, so they get nothing.

See Monopoly Rules “Bankruptcy” page 5 from this PDF link.
It might give GM shareholders and new buyers of GM stock a clue what a fictitious bankruptcy looks like, and what can happen, and how bad off the bankrupt player ends their game. Http://

— from the Securities and Exchange Commission (SEC)

Corporate bankruptcy:
“What Will Happen to My Stock or Bond?
A company’s securities may continue to trade even after the company has filed for bankruptcy under Chapter 11. In most instances, companies that file under Chapter 11 of the Bankruptcy Code are generally unable to meet the listing standards to continue to trade on Nasdaq or the New York Stock Exchange.

However, even when a company is delisted from one of these major stock exchanges, their shares may continue to trade on either the OTCBB or the Pink Sheets. There is no federal law that prohibits trading of securities of companies in bankruptcy.

Note: Investors should be cautious when buying common stock of companies in Chapter 11 bankruptcy. It is extremely risky and is likely to lead to financial loss.

Although a company may emerge from bankruptcy as a viable entity, generally, the creditors and the bondholders become the new owners of the shares. In most instances, the company’s plan of reorganization will cancel the existing equity shares.”

For the sophisticated, here is more on U.S. Code Chapter 11 Bankruptcy:

For more, please see my current post history and my 12 month GM Post history can now be found here:
(includes posts up to 06.02.2009)

This is GM Post #68

Steven asks…

What’s the difference between an RSP and an RRSP?

I’m in my 20s and have just secured full-time employment and would like to start investing wisely. What’s my best option and what’s the difference?

Justin answers:

In Canada, these are really the same thing. It’s just that some institutions and members of the financial community leave off the first “R.” The whole thing stands for registered retirement savings plan.

In general, due to structure of income tax legislation in Canada, it’s best to put income-producing investments such as GICs or bonds into RSPs. This is because income from such securities is 100% taxable outside an RSP, and so one wishes to shelter such income from taxation within the plan.

Meanwhile, one puts dividend-paying securities and securities from which one hopes earn capital gains in accounts outside RSPs, known as “non-registered accounts.” Both dividends and capital gains are favourably taxed in Canada at less than the 100% rate, so one benefits by holding these kinds of securities in outright ownership rather than in tax-sheltered plans.

You might begin by meeting with the RSP or mutual fund advisor at your bank. This person will have lots of suggestions and probably lots of basic literature to give you. Please keep in mind that he or she is a financial salesperson, though.

You would probably want to visit one or two other banks to meet with their representatives before you establish an account anywhere. The purpose here, since you are just beginning to invest, would be to meet several such financial salespersons to see who you feel most comfortable with.

There are other financial institutions that sell investment products. These are, for the most part, former insurance agencies that have expanded into the field of financial planning. Please proceed very carefully here. The bigger agencies are suitable. Some of the smaller shops have salesmen and practices so unstable and so unsupervised that, in the past few years, here and there in Canada, some of these have gone bankrupt and left their “investors” penniless.

The big name discount brokers also have specialized mutual fund advisors, who are not paid by commission. There are no fees or loading commissions at a discount broker, and the size and triple-A quality of the parent bank means security for your account, as opposed to the above-mentioned neighbourhood insurance bucket shop. Think TD, Royal, Bank of Montreal. These all have high-quality discount brokerage operations.

Since you are very young and interested in investing “wisely,” perhaps as a long-term goal you would like to build up your personal expertise and knowledge so as to manage your own portfolio itself.

In Canada, all financial products have a severely high hidden price, much higher than comparable products in the USA. For example, equity mutual funds in Canada commonly have a management expense ratio that is greater than 2.60 or 2.70%, and this does not include one additional cost that is buried deep within the annual financial statement. In the US, equity funds MER is usually one full percentage point lower. Any other “engineered” financial product that you can buy in Canada – an equity-linked note or GIC, for example – will include a hefty fee for its designers and marketers, although this is usually invisible to the small retail investor.

Start with books like “Investing for Dummies,” with reading the business section of your city newspaper, with the business sections of Globeinvestor and the National Post online, with Yahoo finance, Reuters, CNN and Bloomberg news.

As you are learning, you could follow the stock of your own bank, for example, and track its progress in the months and year to come, linking its stock price to earnings announcements, interest rate adjustments by the Bank of Canada, reaction to possible merger news and so on.

Look also for the stock of a much smaller business that’s very familiar to you. Do you shop at a national pharmacy chain like Shoppers, for example? Does the stock of your employer’s company trade publicly in the stock exchange? If not your own employer, what are the related companies or competitors in the same sector that do trade publicly? These are the kinds of companies where it will be easiest to carry out your research.

Good luck to you.

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