Types of Bonds
Posted by Gail | Filed under Investing
New Sticky Situation at the end. Also, a new feature on the Success Post called Thinking Things Through. Head on over and add your 2 bits. And remember to vote on this week’s poll.
Callable bonds can be redeemed or “called” by the issuer before they mature, usually for a stated price and at a particular time.When interest rates fall and issuers know they could float (or sell) new bonds with substantially lower rates, they redeemed their callable bonds. When you’re buying a bond, always check whether it is callable, and if so, when and where. If you hold registered bonds, you will be notified of a call directly. However, if you hold bearer bonds, you need to keep on eye on the financial press so that you don’t inadvertently continue expecting interest to be paid on a coupon for a bond that has been redeemed. (Bearer bonds are unregistered bonds which are payable to the person who presents them. While bonds are no longer issued in bearer form, there are some older bearer bonds that are still in circulation.)
Convertible bonds, which are sometimes issued by corporations, allow you to exchange the bond for common shares of the corporation. This gives you the opportunity for capital appreciation should the common shares of the company increase in value. However, this types of bonds usually pay a lower rate of interest than a nonconvertible bond would.
When investment dealers buy blocks of long-term, high-quality government bonds, detach interest coupons from the bonds and sell the interest coupons and bond residues separately to investors at a discount, these are referred to as strip (or zero coupon) bonds. The term “strip” is an acronym for “separately traded residual and interest payments.” Strip bonds provide an investment vehicle that meets investors’ needs of safe, high-yield fixed-income investments that offer automatic reinvestment of interest. Sometimes referred to as TIGRs (term investment growth receipts) or sentinals, these are secure investments that avoid the reinvesting of small amounts of semiannual earned interest. With a strip bond, you know exactly what the yield will be on your investment at the time of purchase. Maturity dates range from 60 days to 20 years.
While there is a secondary market for the liquidation of strips, here are a few points to note:
• If the interest rate at the time of purchase is higher than the current interest rate, it will be easy to sell the strip bond. However, if the interest rate is lower than the current interest rate, there is less likely to be a market for this investment. It will probably have to be held until maturity (or until interest rates fall below the rate guaranteed by the strip bond).
• Strip bonds are far more susceptible to interest-rate moves than are regular bonds. This is great if you’re planning to use interest-rate moves to your advantage. For example, if interest rates declined from ten percent to eight percent, the price of a conventional government bond would rise by about 20%. However, the equivalent strip would appreciate by about 45%.
• Since strip bonds offer security of principal and guaranteed interest payout, they appeal to people looking for high levels of security with a better return than investments such as certificates offer. However, that security should be further defined. Strip bonds issued by the federal government are very secure. Those issued by other government bodies are usually less secure and, as a compensating factor, offer a higher rate of interest.
Just as you can play the interest-rate game to earn a higher return on your bonds, so too can you play the foreign-exchange game using foreign bonds. Bond trading goes on 24 hours a day, every day, so there’s no need to limit your bond buying to North American bonds. Foreign markets provide opportunities, as well. At any given point in time, some countries have low interest rates, while others have high rates. You can, therefore, get a higher current return on your bond investments by buying bonds denominated in other currencies. But be warned! Playing the currency game can have both a positive and a negative effect on your overall return. Make sure you seek advice from someone very knowledgeable about foreign bonds before you decide to jump in.
Bonds pay out regular amounts, usually twice a year on a semiannual basis. But bond trades are constantly taking place. The registered owner of the bond at the date the interest is paid out will receive all the interest. This means if the bonds were purchased just a few days before the interest payout, most of that interest would have been earned by the previous owner, but paid to the new owner. As a result, there is a mechanism for ensuring that all bondholders receive the accrued interest to which they are entitled.
Let’s suppose you have a $1,000 bond paying ten percent, which you decide to sell. You sell your bond on June 15. The next interest payment date is September 15, at which point the buyer will receive the full six-month interest payment of $50. To ensure each bondholder gets a fair share of the interest pie, however — after all, the buyer only owned the bond for half the time — when the buyer purchases the bond from you, he will also have to pay you three months’ interest, or $25. You’ll get your share of the interest, and so will the buyer.
Next week: The Risks with Bonds
Last week: Bond Quotes
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Sticky Situation: You’re a natural-born fundraiser and you support several charities that are near and dear to your heart. How many times can you hit up the same people for support?
Do you have a sticky situation that you need help with? Send it along to getgvo@gmail with Sticky Situation in the subject line and we’ll see what our great community has to say.
July 20, 2010 at 7:28 am
Sticky situation – not that often. However, if you take the time to find out which charities those you know care about, then they may be willing to make a larger donation to one charity instead of small donations to all of the charities. It would also show them that you don’t want to pressure them into helping support something that they may not have an interest in.
July 20, 2010 at 7:32 am
Bonds are way more complex then I thought they were. Then again my Bond investing has been limited to Canadian Savings Bonds.
As for the sticky situation. I never fundraise. I find in this day and age too many people are trying to fundraise for various projects and it gets overwhelming, I never give out money to the knock at the door fundraising projects. I perfer to hear about the need and then if I think it is a cause I wish to support and we have the money to do so, we’ll walk up to the organization with the need and write a cheque directly.
regards,
Jason
July 20, 2010 at 7:33 am
depends on the amount you’re asking for of course, but i’ve tried to limit my approaching people to once per year. i know that seems like very little, but my family is very involved in charity, and my parents always said that they made a point of never asking people directly for more than that because it can really put a strain.
I mentally ‘break up’ the people i know who i will approach in groups based on how much i thinkt they are likely to give (so my financially strapped sister with two kids is in my ‘$50 or less’ donation group; my wealthy bachelor uncle is in the mega donation group, etc). So, depending on what I’m raising money for, I’ll approach the people where smaller goals count.
I also think it’s important to respect people’s charity dollars, so I try to think about “Is this cause that *I* want to support one that PersonX would likely want to support as well?”. You can’t always know that, but not everyone feels the same way you do so I use that to approach different people as well.
Finally, if I’ve tapped out a person, I mention that I’m raising money for something, but I don’t ask again, and if they offer, I usually say. “that’s fine, you’ve already supported my work once this year, and that was very generous of you”. But, they know what I’m doing, and they can make the call themselves to participate.
July 20, 2010 at 9:14 am
I loathe asking for money, even if it’s for a good cause, so I gladly support friends/family who ask me. Most people only approach me once a year, and I make my donation count at that point. I would feel uncomfortable if someone asked me more than twice a year.
July 20, 2010 at 9:25 am
I would not be fundraising with people that I know. With people that I know, I would be probably talking about the charity, what I am doing for it, and what good it does in the world and hope that my passion resonates and they decide to donate on their own.
I dislike being asked to donate by people that I know… there is an inherent perception of obligation that hits the wrong cord with me.
July 20, 2010 at 9:26 am
I really don’t like asking for donations and I hate it when my daughter has to go door to door for a fundraiser. I usually send an email out the the people who may be interested in supporting the cause and explaine the cause. Then I just say that donations are welcome. If they want they can donate if not it’s less pressure.
I am with Jason and prefer to make my charitable donations directly to the charity. This is why I usually don’t ask face to face. With the email method my friends who feel they want to donate can give me the money or staight to the organization.
July 20, 2010 at 9:29 am
At work, if one of us has a child that is doing some sort of fundraising for school, charity or sports we just put the pledge form on the lunch table…if you are interested in supporting that cause you can give your donation…if not, there is NO pressure at all…simple and painless
July 20, 2010 at 9:31 am
p.s. we also dressdown at work for a different charity each month..so I am already supporting 12 different causes that way…I also have one or two of my own charities that I like to support so I have no problem decling anything else….
July 20, 2010 at 9:31 am
uh…that would be declining…
July 20, 2010 at 9:38 am
I don’t think you should ask the same person more than once a year for a donation. Perhaps you could ask for some help with your charity if they’re the type who like to get involved. It’s really hard when it’s friends because you don’t want to say no.
After many years of donating to MADD I stopped because of the repeated phone calls. I asked them to call only once a year but they continued to call every three or four months so I crossed them off my list and increased my donation to one of my other charities.
There’re scams out there where someone calls and reminds you what you gave last year and asks you to match that amount again this year. I had several of these calls when I knew for certain that I hadn’t given to their causes. One was buying circus tickets for the underprivileged. Beware!
July 20, 2010 at 9:56 am
The internet is a great tool for soliciting donations for charities. I love the fact that most charaties can set up a page for the runner/biker/walker for their cause..you just send around an email with the page, people can donate if they wish but the reciepient does not know who or how much they donated.
I know many people don’t like it when sports teams/schools look for donations. I tend to donate to auction books where I spend my money anyways on a daily basis. I can get gift cards to the movies, acitivities for the kids, haircuts, ski passes etc. cheaper and the cash goes to the charity instead of the business. It brings a sense of community knowing that those businesses support our children.
The one thing that I absolutely have no problem selling is Girl Guide Cookies! People come to me for them and ask for them all year. It is the one fundraiser that keeps our camps open and provides subsidies for girls to attend camps, join for a super low price ( approx. $35 for a whole year of guiding).
I think I am one of those people because my kids are involved in so many activities…but seriously I look to spend my money on fundraising (cookie dough, magazine subscriptions), stay at home moms who start up businesses (tupperware, avon, Discovery Toys), and at Charity Stores (Value Village, Salvation Army). That way my money is being directed at places I value rather than corporations.
July 20, 2010 at 10:00 am
@ Linda- that’s too bad…we were hit by a drunk driver two years ago and I still have not fully recovered…the movies and commercials they produce for the schools are changing the attitudes for the next generation…anyways it’s too bad that technology sometimes overwrites human contact..I wonder if it’s an automated phonecall before a person gets to talk to you…I’m going to look into it because that would be frustrating!
July 20, 2010 at 10:03 am
Ugh, the circus ticket one, disturbing on so many levels,especially because they normally say that they are calling from the Police Services , but I won’t get on that box today.
I despise being asked at the checkout counter for a donation. I get to explain to the girls why I am not donating (which isn’t necessarily a bad thing).
I don’t personally go out and fundraise for anything. For the school if they are selling something that people can actually use I don’t have problems with it (like cheese, or christmas cards). When the neighbour comes by raising funds for the Cancer Society I am definitely stuck giving a donation, but again it isn’t like I don’t agree with that cause.
I had one phonecall at work, raising funds for some kind of cause, and I explained to the man our policies on giving. He went off on a tirade about how unfair our practices were! The company I work for is diligent about giving back to the community, I wanted to get his number and report him, I was furious.
July 20, 2010 at 10:24 am
If a person was truly a natural-born fundraiser then wouldn’t they be able to raise the funds without having to continuously asking the same people?
I get irate when friends ask me for fundraising money. I never ask friends for money – if I am given fundraising to do for my children I just buy the whole lot myself.
Everyone is in the same situation of having to give money to various fundraisers, and everyone can decide for themselves what charity to give their money to, without feeling pressure from an acquaintance/friend.
July 20, 2010 at 10:33 am
Erin – I also donate to MADD but I swear they call me at least twice a month throughout the entire year. I donate every year just before Christmas but I get phone calls all year long. I have asked them to only call me once a year but I can’t seem to get through to them as every time it is a different person. Lately I just don’t pick up. I still donate but it is very frustrating.
I also think that asking friends and family once a year is enough. Although, at our work we also do the “put the pledge form on the table” and whoever wants to donate can do so.
July 20, 2010 at 10:57 am
Sticky Situation:
Ugh.. I have a friend who is a do-gooder for everything going. Sometimes it seems she only ever contacts me when she is doing a run, having a pyramid craft party, or a school fund-raiser. I continued to get fooled, really believing that she was interested in an actual visit, that always seemed to turn into a ploy.
I just began to screen my calls and avoid her. It’s a shame….I enjoyed her friendship and most of her causes were great…. but there comes a point where too much is too much.
I would say don’t bug your friends more than twice a year…. they will avoid you permanently.
July 20, 2010 at 10:58 am
Re:Sticky situation – when you have kids in activities, it is almost an automatic that there will be fundraising involved. Some requires you to work at a ‘x’, which is alright, but there is the inevitable forced selling of the cookies/chocolates/hams/turkeys/poinsettias/ etc. We have a small staff and lots of us have kids. We use a low key sales pitch. We pop the info on the bulletin board and leave it up for a week. If there are takers, great, if not, they come down after a week and you know you tried.
With charities, it is staggering how many charities appeal to the schools to help them. We choose 1 a year to support in terms of collecting money and try to vary which one it is each year.
At home I finally learned to say no to the door to doors (unless you know the person – that is much harder). I simply say “I’m sorry, my sister was diagnosed with MS this year and that is the charity we are supporting’.
July 20, 2010 at 11:05 am
I gave to a children’s hospital in memory of the stillborn child of close friends. They requested donations go there in lieu of flowers. The hospital then proceeded to hound me for years afterward. I finally told them they were ruining my gesture of sympathy by coming after me. Haven’t heard from them since.
July 20, 2010 at 11:11 am
Ironic that you mention the charity thing today. I made a contribution to a nationally recognized charity a few years back, then bam, I had this charity calling, that one, and then yet another. They sold my name. So when I got the call yesterday, I said sorry, I don’t have the funds. I hate to do that, but when some company sells me out as being charitable, that is not so charitable on their part. Their donors lists should not be shared.
July 20, 2010 at 12:15 pm
I had no idea that bonds were extensive and complicated. I guess there really are more out there than CSB’s!
As to the sticky situation:
As someone that grew up with sports teams, we tried very hard to make sure our fundraising efforts were unique and different. This often helped with the ability to speak to people in the neighbourhood for their help. I can remember doing [fill-in-the-blank]-a-thons at school that required us to fundraise – though back when I was smaller, it seemed easier to get this done, and people seemed more willing to help you out from your neighbourhood. Now I make donations directly to the charity of my choice, and only ask people to contribute to 2 charities a year – WWF (something I’ve been passionate about since I was 7, ans I request a donation because I do the CN Tower walk) and either the cancer walk or the arthritis walk. I alternate between these, since my grandfather has beaten prostate and bladder cancer so far, and my mother has psoriatic arthritis. Other than that I try to refrain from asking people for money.
Many different charities means you have a big heart, but makes people uncomfortable because it will seem like you are always asking for money for one thing or another. If you are really passionate about helping, there are many other ways to donate to the charity without requesting money from people – like giving of your time as a volunteer for something for the charity. This will help people understand you really are passionate about the charity, and perhaps prompt unsolicited donations.
July 20, 2010 at 1:07 pm
RE: Sticky Situation. I would ask twice; once for the donation of money, and once for the donation of time. I find a lot of people are more quick to give their time but may think twice about donating money.
For people that can’t afford to donate money or are on a tight budget this is a great alternative and is often more rewarding.
July 20, 2010 at 2:03 pm
GAIL ON STEVEN AND CHRIS NOW!
Totally off topic, but on CBC’s Steven and Chris (2pm eastern) they just said Gail would be on the show later.
July 20, 2010 at 2:53 pm
I agree with Kat: “I dislike being asked to donate by people that I know… there is an inherent perception of obligation that hits the wrong cord with me.”
The only time I have hit people up for charity money is if they get something in return, like when the kids’ sports team is selling chocolate bars.
July 23, 2010 at 6:28 am
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July 27, 2010 at 5:11 am
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