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From: 2212zap@mhuxm.UUCP (putnins)
Newsgroups: net.invest
Subject: Re: long term investments
Message-ID: <349@mhuxm.UUCP>
Date: Mon, 18-Mar-85 18:54:10 EST
Article-I.D.: mhuxm.349
Posted: Mon Mar 18 18:54:10 1985
Date-Received: Tue, 19-Mar-85 05:25:16 EST
References: <1336@sunybcs.UUCP> <610@ccice2.UUCP>
Organization: AT&T Bell Laboratories, Murray Hill
Lines: 42

> 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
			.
			.
			.
> 
> 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.
> 
	One additional thing to remember:
	Just like all other securities, brokers charge a commision on selling
these bonds to you.  Normal commissions on stocks are ~2-5%, depending on your
transaction amount.  For zeroes, I've seen commisions as large as 15%.  If you
translate this into a new effective interest rat (because you've spent more 
money for the same face value) you reduce a 12% rate to ~11.2, a 16%  rate to 
15%.  ALternatively, brokers may charge on 3% commision, but they make their
money on a "mark-up" on the price of the bond.  They buy a bond for $100, mark
it up to $110, charge you 3% "because their nice  guys", and you wind up paying
13% over the market rate.  The way to find out is toask the broker how much
the firm payed for the bond.  If he hesitates, go someplace else.