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!burl!ulysses!mhuxr!mhuxt!houxm!whuxl!whuxlm!akgua!sdcsvax!sdcrdcf!shaprkg From: shaprkg@sdcrdcf.UUCP (Bob Shapiro) Newsgroups: net.invest Subject: Re: long term investments Message-ID: <1848@sdcrdcf.UUCP> Date: Thu, 21-Mar-85 17:28:51 EST Article-I.D.: sdcrdcf.1848 Posted: Thu Mar 21 17:28:51 1985 Date-Received: Tue, 26-Mar-85 03:36:30 EST References: <1336@sunybcs.UUCP> <610@ccice2.UUCP> <349@mhuxm.UUCP> Reply-To: shaprkg@sdcrdcf.UUCP (Bob Shapiro) Organization: System Development Corp. R+D, Santa Monica Lines: 73 Summary: In article <349@mhuxm.UUCP> 2212zap@mhuxm.UUCP (putnins) writes: >> 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. I don't know where you are buying your stocks and bonds but the rates you quote are out of sight. The only way you would pay 2-5% on stock commissions is if you make odd lot purchases and deal with a full service broker. Even a full service broker wouldn't charge that much for 100 share lots. As for bonds they typically sell from $5 to $10 a bond although I have occasionally seen brokers who charge as high as $15 a bond. There is usually a minimum such as $30 to $50 so once again small purchases are more expensive. Since zero-coupon bonds are discounted you are paying a higher percentage for commission per bond. e.g. A $1000 bond with a commission rate of $10 is a 1% rate but if it is zero coupon it might sell for $250 or a 4 per cent rate. I guess you would have to buy a single bond from a broker with a high minimum and the bond would have to have a very long maturity to ever get into a 15% rate. By the way $5000 bonds are treated like 5 $1000 bonds so the commission rate would be $50 if the broker charged $10 a bond. Since your bond would tend to increase in value as it neared maturity your broker's rate would tend to go down if you measure it as a per cent rate. If you want to buy bonds you should always buy enough bonds to cover the broker's minimum or you will take a beating. It is similar to the odd lot problem in stocks. I have had no problem finding both full service brokers and discount brokers who will sell me bonds at $5 a bond with a minimum typically of $25 to $30 dollars. As for stock you should not pay more than 1 to 2 per cent commission from a full service broker on 100 share lots of at least 25 dollars per share and if you buy 1000 share lots the commission should be closer to 1/2 of 1%. Discount brokers will be even cheaper, especially on the smaller purchases. If you can't afford to buy stocks and bonds in reasonable quantities you probably should invest in some other media like mutual funds.