Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP
Posting-Version: version B 2.10.2 9/18/84; site ccice2.UUCP
Path: utzoo!linus!philabs!cmcl2!seismo!rochester!ritcv!ccice5!ccice2!bwm
From: bwm@ccice2.UUCP (Brad Miller)
Newsgroups: net.invest
Subject: Re: long term investments
Message-ID: <610@ccice2.UUCP>
Date: Fri, 15-Mar-85 13:12:30 EST
Article-I.D.: ccice2.610
Posted: Fri Mar 15 13:12:30 1985
Date-Received: Sun, 17-Mar-85 20:50:51 EST
References: <1336@sunybcs.UUCP>
Reply-To: bwm@ccice2.UUCP (Bradford W. Miller)
Distribution: net
Organization: CCI Central Engineering, Rochester, NY
Lines: 64
Summary: 

In article <1336@sunybcs.UUCP> lazarus@sunybcs.UUCP (Daniel G. Winkowski) writes:
>
>	Being a novice at investments, I am seeking advice on long term
>(10 to 20 years), relatively low risc investments. Perferably, they should
>have a low capital entry level (<= 1000). I read somewhere about a type of 
>long term bond, that for a ~$50 purchase would mature in 20 (10?) years to
>$1000. 
>		- suggestions are welcomed
>Dan Winkowski @ SUNY Buffalo Computer Science (716-636-2879)

What you seem to be referring to is what is known as a zero-coupon bond, or a
'zero'. A 'normal' bond usually has 'coupons' which are redeemed periodically
for the interest then due on the note. (If the coupon is redeemed late, you
don't get any additional interest -- thus several banks and brokerages make
money offering a coupon clipping service keeping this up for you). A zero
does not have coupons, instead the interest is reinvested, and the original
bond is discounted such that the FINAL MATURED value is equal to the face
value of the bond. As an example, a zero maturing in 20 years with a market
rate of 11% would cost you $11.75/$100 face value. Since bonds are only
sold in multiples of $1000 face value, you would pay $117.50 for a $1000 bond.
Note also that most brokers require a MINIMUM purchase of $5000 face value
of bonds - in order to avoid it, you need to go to a broker that carries an
inventory, such as Merril-Lynch, although they might not inventory the particular
bond you want.

One type of zero is known as a CAT, or Certificate of Accrual on Treasuries.
Basically, this uses Treasury bonds to insure that the money you put in will
be there in 20 years (or whatever the maturity you desire). This is probably
the safest zero you can buy.

Note that the longer the maturation date (or the higher the interest rate)
of your zero, the less you must pay for it up front -- this is part of the
wonder of compound interest! Some price examples:

6% 14years:	$43.71/100

11% 15years:	$20.06/100

14% 20years:	$6.68/100

Some things to remember when buying zeros: They are
a) relatively illiquid (they are hard to resell).
b) they are VERY volitile. Minor interest rate changes can (because of
the compounding over 20 years) change the current value of your bond
significantly. Therefore, you are reccomended to only buy what you intend
to hold to maturity. An example, suppose you bought a 20year 11% CAT today
(hypothetical market value) for $5000 face value for $587.50. If interest
rates on the CAT rose to 14% a year from now and you had to sell, you
could only get $382.50 for it (ignoring commissions which are usually figured
into the interest rate quoted by your broker). Thats a 35% loss!! All you
are 'guaranteed' by the zero (and the guarentee is as good as with any bond,
i.e. if you want to put down $5/1000 for a 40 year 16% zero, do you really
expect the company or local government project to be there in 40 years) is
that at maturity you can cash it in for the face value.

Hope this helps. I have put some CATS into my IRA as it happens, both to
guarantee an interest rate, leverage myself in case of a positive move on
interest rates, and shelter that interest from current taxes, all for a 
minimum of 'cash on the line'.

Brad Miller

-- 
..[cbrma, ccivax, ccicpg, rayssd, ritcv, rlgvax, rochester]!ccice5!ccice2!bwm