Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP Posting-Version: version B 2.10.2 9/18/84; site sdcrdcf.UUCP Path: utzoo!watmath!clyde!bonnie!akgua!sdcsvax!sdcrdcf!shaprkg From: shaprkg@sdcrdcf.UUCP (Bob Shapiro) Newsgroups: net.invest Subject: Re: long term investments (0's) Message-ID: <1851@sdcrdcf.UUCP> Date: Fri, 22-Mar-85 10:35:25 EST Article-I.D.: sdcrdcf.1851 Posted: Fri Mar 22 10:35:25 1985 Date-Received: Mon, 25-Mar-85 02:17:44 EST References: <610@ccice2.UUCP> <614@ccice2.UUCP> Reply-To: shaprkg@sdcrdcf.UUCP (Bob Shapiro) Organization: System Development Corp. R+D, Santa Monica Lines: 68 Summary: In article <614@ccice2.UUCP> bwm@ccice2.UUCP (Bradford W. Miller) writes: >Some more info that I omitted from my original article: > >Tax considerations! > >Something that is VERY important about 0's based on Govenment obligations >(i.e. not a tax-free muni 0) is that the IMPUTED interest (that is the >interest you would have been receiving on the zero had it been paid to you) >is taxable EACH YEAR. Now if you (like me) don't really feel like paying >taxes on money that hasn't been paid to you, you will only use them for >your IRA or KEOGH account. > >If, on the other hand you bought a tax-free muni 0, you won't have this >problem, BUT you might fall into another VERY BIG hole: > >The issuing authority may call the bond!! Most muni (though I am told not >all) 0's can be called early. The problem is, that they are called for the >ORIGINAL ISSUING PRICE plus the interest thru the call date. SO, if you >payed a premium above it's current value (like, the 'current' rate is >better than the 'issue' rate) YOU COULD LOSE MONEY IF IT'S CALLED. > >The only way to avoid this is to a) buy uncallable muni 0s, >b) make sure you are buying at a discount, so you will get a premium if >it is called or >c) buy at the end of a series, so your bond will be the LAST to be called, >and thus less likely. > >Brad Miller > >-- >..[cbrma, ccivax, ccicpg, rayssd, ritcv, rlgvax, rochester]!ccice5!ccice2!bwm On the other hand bonds that are callable and selling above par have been discounted by the general marketplace such that they tend to pay a higher interest premium. In addition since you are paying your broker a commission per bond you get more bang for the buck when you buy a bond above premium than below it. If you are talking about tax-free bonds you may have to pay capital gains tax on the profit and if you are using them for an IRA you may have a capital gains situation for your IRA. (An undesirable situation since the IRA treats all income the same and capital gains situations tend to be lower rates of returns because of their tax advantages). The bottom line is that there is no free lunch. If you want to eliminate risk of losing your principle than you must accept lower interest rates. The bond market is not a great deal different than the stock market. When you buy something you get some return as interest (almost the same as dividends for stock) and you get either a profit or loss on the principle depending on the general conditions of the bond market. The biggest difference is that bonds have a day of reckoning which stocks do not and bond interest is fixed for the life of the bond while stock dividends may be either raised or eliminated. In addition the factors that tend to control bond value are more related to the what an acceptable rate of return for that type of bond is at the current time rather than the more emotional issues that govern the stock market. The only strong case for buying bonds at a deep discount is for convertible bonds. Now if the bond takes off it has no high restriction but you can limit your loss on the low end. It is a little like buying stock except that you have a built in cushion on the low end when the interest rate of the bond becomes equal to that of a non-convertible bond which will slow its descent as opposed to the stock of the company. Obviously if the company goes under everybody loses both bond and stock holders but at least you get to stand in line in fron of the stock holders. I have made quite a bit of money buying bonds in this fashion. Smarter people than us have been playing the bond market and the forces that they generate tend to equalize all investments. What each individual has to do is look at his/her own situation and react accordingly. What may be right for you may be wrong for me. Long term, short term, liquidity, safety, are all issues and they are probably different for each of us.