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Trading Strategy
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Bonds Trading
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Investment in U.S. savings bonds - return and risks
U.S. saving bonds are geared to small, conservative investors interested in safety, capital appreciation, and tax savings. Series EE bonds would not be attractive to investors looking for income or aggressive investors looking for capital appreciation.
Bond investment strategies - passive and active
A variety of bond investment strategies are possible, depending on the investor's resource, risk preference, tax status, investment horizon, income and liquidity needs. Two broad classes of bond investment strategies may be identified: passive and active. A passive investment strategy is one in which the investor seldom trades securities, but rather purchases and holds them until maturity or the investment horizon is reached. An active strategy is one where the investor frequently trades from one security to another in an effort to achieve superior performance.
Guide to U.S. Savings Bonds (series EE)
One of the simplest investments available to small investors is the U.S. Saving Bonds, Series EE. They are easy to buy, and they are available in much smaller denominations than other types of bonds. You can buy a savings bond for as little as $25.
How bonds work
Bonds are issued in denominations of $1,000 and increments of $5,000 thereafter. This is called bonds' face, or par, value - the full amount of the loan to be paid back when the bond reaches maturity. Maturities on bonds range from 10 to 30 years. Bonds with maturities under 10 years are called notes.
Common bonds among bonds
Every bonds issued is either secured or unsecured. A secured bond is backed by specific assets of the borrower, which can be sold to repay the lender if the borrower, which can be sold to repay the lender if the borrower goes belly-up and defaults. Mortgage-backed bonds and equipment trust certificates would be examples of secured bonds. Unsecured bonds (called debentures) are those backed only by the full faith and credit of the borrower.
What are bonds
In financial market lingo, a bond is a long-term loan made by an individual to an institution, which agrees to repay the full sum of the loan at the date of maturity, plus a fixed or floating rate of interest on the money borrowed at established intervals along the way. In other words, it is basically an IOU that promises repayment of your money plus interest over a set period of time.
Upside potential with convertible bonds
Convertible bonds are bonds issued by corporations that are backed by the corporations' assets. In case of default, the bondholders have a legal claim on those assets. Convertible bonds are unique from other bonds or debt instruments because they give the holder of the bond the right, but not the obligation, to convert the bond into a predetermined number of shares of the issuing company. Therefore, the bonds combine the features of a bond with an "equity kicker" - if the stock price of the firm goes up the bondholder makes a lot of money (more than a traditional bondholder). If the stock price stays the same or declines, they receive interest payments and their principal payment, unlike the stock investor who lost money.
Investment Basics: Don't forget about bonds
You should consider investing in bonds for both income and stability. In any given year equity markets could appreciate in value by 30 to 40 percent or decline in value by the same amount. Bonds fluctuate far less. Bonds also pay interest on a regular basis and thus investors will receive a cheque each month or quarter.
Less risk with foreign bonds
Foreign bond funds are ideal for investors seeking income and diversification. Foreign bond funds, as their name suggests, invest in bonds that pay their interest and principal in a currency other your home currency. Foreign government and corporations issue these bonds.
Higher income from high yield bonds
To understand high yield bonds, let's define what a bond is. A bond is an interest-bearing investment that obliges the borrower to pay a specific amount of interest for a specific period of time and then at maturity to repay the investor the original amount of the loan. High yield bonds are bonds issued by corporations. These companies pay interest rates higher than those of top quality government or corporate bonds to attract investors. Corporate assets back the bonds; incase of default, the bondholders have a legal claim on those assets.
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