I am looking at a banking investment bond. What are the pitfalls of investing in a bond ? what are the?

Question

advantages ?
In the bond description, it has terms like coupon, coupon frequency, price dealt and yield to maturity.
What are these ? Hope someone can enlighten me. Thanks.

Answer 1

A bond in simple layman's term is like an "I Owe You". It is a piece of paper that says I borrowed so much money at a certain interest rate. After so many years, I will pay you back the entire amount".

Example, if you buy a $1000 bond paying 5% interest with a 20 year maturity, you would be receiving 5% interest ($50 worth of interest a year for your $1000 investment) every year for 20 years. At the end, you get your $1000 back. That is your coupon rate.

Frequency is how often they pay the interest. Do you get your fifty dollars at the end of the year or is the interest payment spread over semi annually? Quarterly?. The more frequent they pay you, the sooner you can reinvest the earnings.

Yield to maturity...well that is a mouth full and we do not have enough space here to have a good discussion. It is a sophisticated mathematic model to measure the "Internal Rate Of Return". It measures the value of a stream of income taking into consideration the future value of money ("discount rate", because money worth less in the future than now).

However, there are easier ways to deal with that for us common folkes. The value of those pieces of paper call bonds, or that I.O.U, fluctuate in value according to changes in interest rate. So if you buy a bond at 5% today and the Federal Reserve raises interest rate on you tomorrow to 7%, you will have to sell it at a discount if you need to get rid of it. The opposite would be true.

This is what you may want to look at it. So let say you are buying the same bond we mentioned and yield to maturity rate is 5%. However, the person selling it to you is offering to sell it to you at a current yield of 7%. You will be buying that bond at less than $1000. In other words, since the market interest rate is 7%, in order to sell the bonds, the seller has to discount the price or else, no one would buy it. The opposite would be true if interest rate drops. So aside from interest earnings, there are potential capital gain (or loss) possibilities in bonds as compaired to putting the money in a savings account.

I hope that can at least clarify some of the terminologies a little bit.

Answer 2

earlier the repeal of the Glass-Steagall Act, commercial banks could not do company with investment banks. as quickly as this act exchange into repealed in 1999, banks began going out of company. Now that commercial banks could make investments in the inventory industry, they see no would desire to own loan people money.

Answer 3

Well, depending on the interest rate, the par value could go down.