Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP Posting-Version: version B 2.10.1 6/24/83; site ssc-vax.UUCP Path: utzoo!watmath!clyde!burl!hou3c!hocda!houxm!hogpc!houti!ariel!vax135!cornell!uw-beaver!ssc-vax!eder From: eder@ssc-vax.UUCP Newsgroups: net.invest Subject: Re: How to profit with interest Message-ID: <151@ssc-vax.UUCP> Date: Thu, 17-May-84 16:36:55 EDT Article-I.D.: ssc-vax.151 Posted: Thu May 17 16:36:55 1984 Date-Received: Sat, 19-May-84 01:29:41 EDT References: <158@exodus.UUCP> Organization: Boeing Aerospace, Seattle Lines: 29 17 May 1984 If you believe interest rates are going up, there is a way to make a profit on the information. The price of existing interest-bearing securities varies inversely with interest rates. For example, an 8% treasury bond will sell for 50% of face value when interest rates are at 16%. This raises the effective yeild of the bond to: 8% / 50% = 16%. What you have to do is contract to deliver an interest bearing security at some date in the future. You do not have to own the security. If interest rates increase in the interim, you will be able to buy the security for less than the contract price, and pocket the difference. An organized activity exists for this sort of thing, called the 'futures markets'. Most speculators never are involved in the actual commodity, which ranges from such things as 1000 bushels of wheat to 42000 gal of No. 2 heating oil to $100 000 face value of Treasury Bonds. What they do is buy and sell one half of a contract. One half is the obligation to buy the commodity, the other half is the obligation to sell. Speculators sell the contract before the delivery date to someone who actually needs it, or another speculator. An example of someone who needs this stuff is a wheat farmer on one side and a bakery on the other. Commodities trading can be done on small margins (like 10%), which means a ten percent movement in the underlying commodity can double your money or wipe you out. This is like horse racing, but a little slower.