This article discusses
buy high yield bond - junk bond yield.
Institutional investors generally ignore junk bonds, which is why prices
are low. Reasons: (1) Pension-fund managers stay out because they're
investing conservatively for people's retirement. (2) The volume of junk
bonds is limited, and institutional investors with massive cash inflows
to invest find that they distort the market and ruin profitability by
making large purchases. (Small purchases aren't worth their effort.) (3)
Institutional investors often abandon lower-paying junk bonds during
periods of rising interest rates to take advantage of higher yields on
more recent issues.
When to buy: The best time is when interest rates are peaking. As
interest rates drop, low yielding junk bonds become relatively more
attractive and prices tend to rise quickly.
See
high yield bond
for more information.
Who benefits from buying junk bonds: People with as
little as $25,000 to invest as speculative capital.
Risks: Junk bonds derive their name from their poor rating, and the
specter of default scares many people off. Should the recession become
severe, the dangers are multiplied. But junk bonds are safer than they
appear. The evidence:
(1) In the past 50 years, less than 5% of all junk bonds have defaulted.
(2) When default is imminent, senior creditors (banks, insurance
companies, etc.) usually defer their claims or settle for much less to
keep the company out of bankruptcy. Junior bondholders, in practice,
almost always come out with full payment.
(3) Many junk bonds are issued by America's top corporations, which may
experience hard times but aren't likely to go bankrupt.
Strategy for investing in junk bonds:
Diversify. Spread a $25,000 investment over five to ten issues.
Pick bonds where the discount is due to lower yield and not to the risk
of insolvency.
Look for bonds trading at the lowest prices. (Note: Junk bonds are
traded on the New York and American Bond exchanges. Remember to add a
zero to quotes when figuring price.)
Avoid issues where the government might intervene. (Example: Railroads,
airlines, municipals.) Stay away from the real estate investment trusts
(RE ITS) because they are illiquid and hard to figure.
Rule of thumb: If the junk bond has a ten-year maturity, assume the
price ought to rise by 10% a year. Sell the bond if the price rises by
20% one year and reinvest in something else-unless attractive interest
rates make the bond worth holding longer. Buy more bonds if the price
falls, because the return on investment at maturity will be that much
greater.
To
Buy High Yield Bond - Junk Bond Yield
- Top
Important: Junk bonds are discounted because the
company's rating isn't very good. Don't expect to hear good news about
the company. Don't get cold feet and sell out if the price begins to
fall.
Now I will discuss Investing In Foreign Currencies.
There are two ways to take advantage of the ups and downs of managed
floating rates between currencies: Investing and speculating.
Investing: Your main concern should be to conserve your capital, not to
make large gains. At any time that your dollars are weak you want to put
them into a stronger currency. For several years, it made sense to put
savings into German marks, Swiss francs, and Japanese yen.
This has changed however. While several years ago there were strong and
weak currents, the flight into the strong currencies is coming to an
end. The philosophical reason:
The strong currencies have become weaker. Currency valuation is based in
part on inflation rates, and the inflation level is creeping up in
Germany, Switzerland and Japan.
If you have savings: It may be better to have them in Swiss francs than
in U.S. dollars at any time the Swiss bank pays you 5 % interest or
better on those francs. Allowing for inflation and currency
depreciation, that could be the equivalent of getting 12 % interest on a
savings account in the U.S. Problem: Converting currency from dollars to
francs may be costly, especially if it's done in Switzerland. Have the
currency exchanged in New York, and expect to pay 1/2 % to 1 % of the
entire amount.
If you can only get a 2 % or 3 % interest rate on a Swiss bank account,
forgo the option. There is some inflation in Switzerland, and the low
interest rate will wipe out any advantage the differential could give.
Speculating: It still offers a way to make large gains
on currency fluctuations. Example: If you can anticipate that the
British pound will decline in the near future by 3 %, then you might
think about selling the pound on margin on a forward basis. Then, a 3 %
decline on a 3 % margin will mean a 100% profit on the actual amount put
at risk. (If you are a regular customer, you could get the currency
forward without paying the margin. If not, it will cost you 5 %.)
Even experts are frequently misled in foreign-currency dealings. So if
you are a rank amateur, you may have a hard time juggling foreign
inflation rates, interest rates, and balance of payments, the most
important bases for the way a currency will turn.
Investing In Antique Silver: Investing in antique silver can pay off
handsomely. Reasons: Silver prices are very low about $6/ounce, compared
with nearly $50/ounce in 1980. And many quality antique pieces are very
inexpensive. Examples:
Antique teapots can be bought for $2,000, trays for around $720,
sauceboats for about $800. Important: Be prepared to hold on to valuable
silver for several years. Prices are likely to go up,
but
they'll do so slowly.
Source: Consumer Information Center
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