What is up with this? Has the US. Gov. completely gone to "Crap" ? Do you have to have an inside track with G.W. Bush? How can the stock market go from below 10,000 when I purchased the bond to over 13,000 now...and it's market value just goes down lower more and more all the time? What's the deal? I will never purchase a US Bond ever again. I am beginning to think that America is really in trouble.
2007-07-13 04:24:37 · 6 answers · asked by Sonnyblu442 2 in Business & Finance ➔ Investing
You just beginning to think??? It is in trouble a long time now. Wake up men. The way you are losing your money is called inflation. It will be much much worst before it will get any better.
2007-07-13 04:31:59 · answer #1 · answered by lesyaukrainka 2 · 0⤊ 2⤋
The value of mortgage backed bonds are heavily influenced by inflation and interest rates. If either one of those rise, the value of you oustanding bonds will fall. However, if your interest is reinvested, it can be reinvested in new bonds that pay higher interest, so it balances out.
Another tricky aspect of mortgage-backed bonds is that they have a "prepayment risk". Since these bonds are basically repackaged mortgages, if a lot of the homeowners sell their houses and pre-pay their mortgages, you get the principle back quicker than anticipated and miss out on some of the interest. So, their values can go down even if interest rates fall. Doh !!! However, mortgage-backed bonds have slightly higher interest payments (compared to Treasury bond) to compensate for this.
Before you condemn America or government-backed bonds, perhaps you should learn a little about them. Download my free book at http://www.invest-for-retirement.com and read chapters 10, 11, and 12. These will teach you everything you need to know about bonds.
You will see that the value of these outstanding bonds fall not based on what Fannie Mae is doing, but from what is happening in the secondary market independent of Fannie Mae. Bonds are only issued and redeemed at par ... what happens in-between depends on free market forces ... the same forces that make this country so great. It is because we live in a free country where our government allows free markets to operate, instead of price controls and rationing, that stocks and bonds will fluctuate in price based on supply and demand. The other option is to have an overly oppressive government, and I don't think you'll like that one bit.
"The minute you begin to think the problem is out there, that very thought IS the problem." - Steven Covey, The Seven Habbits of Highly Effective People
2007-07-13 19:13:08 · answer #2 · answered by derobake 4 · 0⤊ 0⤋
First of all the Federal National Mortgage Association (Fannie Mae) is not part of the US Government. It is a publicily traded company that was chartered by congress to purchase mortgages that meet certain criteria from banks (to create mortgage liquidity in the market) and repackage them as Collarterialized Mortgage Obligations (CMOs) in the secondary market to be sold to individual investors such as you. The bonds are not even rated but trade at an "implied" AAA level because of the belief that the US Goverment would never allow the company to fail becuase of the disaserous consequences it would have for the enonomy in general.
Your bond is expected to go down in value when the stock market goes up, and vice versa, as money generally flows back and forth from fixed income to equities.
As interest rates rise, the coupon on newly issued bonds is higher than the rate on your existing bond, thereby hurting its current value. However, there is a way around this. You never should have bought any individual bond/CMO that you do not fully expect to hold to maturity or average life. Regardless of the current reported paper value of the bond you hold, it will pay back 100% of face value at maturity, or when the underlying mortgages that it is comprised of pay back early.
If you bought this instrument from a Financial Advisor, I trust you told him/her that you wanted something resonably safe that paid a decent rate of interest. In that case, this was an appropriate investment assuming your risk tolerance is in line. They may not have done a good job at explaining to you how the bond price would react given different market conditions.
Simply take your monthly check that the bond is paying (if its a CMO), spend it and wait until 100% of your principal is returned at maturity or redemption.
2007-07-13 12:59:25 · answer #3 · answered by KevK 2 · 1⤊ 0⤋
Fannie Mae has nothing to do with the government or stock market, just housing market and the mortgages. Housing market has been in a slump, people default on mortgages, FNMA bonds go down. You also have to consider accounting; as your bond gets close to maturity, the price will decline. Interest rates also factor into the price of bonds. GWB? Not so much.
2007-07-13 11:32:41 · answer #4 · answered by shoelace 3 · 0⤊ 0⤋
The price of bonds is not tied to the stock market index. Its much more a factor of overall interest rates, and the financial stability of the issuer. A bond is like a loan you make to the issuer. If they run into sales or regulatory difficulties, that will reduce their financial strength, and the value of the bonds may go down. But interest rates is the biggest factor.
Always invest in several investments if you don't follow the market very closely.
2007-07-13 11:39:52 · answer #5 · answered by hottotrot1_usa 7 · 0⤊ 0⤋
Bonds are tied to interest rates.
When the economy is good and interest rates are low as they are now, people buy and invest in stocks.
When the economy slows and interest rates rise, the rate of return on bonds also increases.
This is why it's good to have diversification in your portfolio. In other words, a good mix of stocks and bonds.
Here's a good site that explains it in better detail.
http://stocks.about.com/od/understandingstocks/a/Bondint111004.htm
2007-07-13 11:33:07 · answer #6 · answered by mister_galager 5 · 0⤊ 0⤋