Relay-Version: version B 2.10 5/3/83; site utzoo.UUCP Posting-Version: version B 2.10.2 9/18/84; site dciem.UUCP Path: utzoo!dciem!davec From: davec@dciem.UUCP (Dave Cote) Newsgroups: net.invest Subject: Re: long term investments Message-ID: <1488@dciem.UUCP> Date: Wed, 27-Mar-85 14:58:28 EST Article-I.D.: dciem.1488 Posted: Wed Mar 27 14:58:28 1985 Date-Received: Wed, 27-Mar-85 15:20:53 EST References: <1336@sunybcs.UUCP> <610@ccice2.UUCP> <349@mhuxm.UUCP> <1848@sdcrdcf.UUCP> Organization: D.C.I.E.M., Toronto, Canada Lines: 90 > 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. The March issue of Money gives the difference in commissions charged by various sources of zero coupon bonds. For a $1,000 zero maturing in 2003, the compounded annual returns ranged from 10.93 to 11.2% when taking into account the dealer's markup. That spread represents a $17.47 higher purchase price for the lowest-yielding bond. Quotes obtained were: * Shearson Lehman/American Express: price, $151.25; yield, 10.93% * Dain Bosworth: $144.50; 11% * Dean Witter: 139.26; 11.1% * Fidelity Brokerage: $133.78; 11.2% Hello Fidelity... Dave Cote utzoo!dciem!davec