Investment: Loans/Bonds
Um, completely tangential to anything regarding this forum. Since, investment is a bit of a sticky subject; I should probably post a few rules beforehand.
Rule #1) Do not recommend specific bonds to buy or sell.
Rule #2) Discussion will be about mechanics and behaviors in the market and what they do to bonds.
Rule #3) Moderators of the forum heed this well. Feel free to close this thread if you are uncomfortable with this topic being discussed in your forum. I will begin to post content on this thread in a day or two. If I find this thread closed in a day or two, I will not bring up the subject of investment in these forums again; and you have my apologies in advance.
Note: I am not an expert in this subject. I have been reading about investment recently and I have been trying to wrap my head around the process. In regular Occulus fashion, I will be regurgitating papers, urls, and research. If I say something foolish, please feel free to correct me.
Rule #1) Do not recommend specific bonds to buy or sell.
Rule #2) Discussion will be about mechanics and behaviors in the market and what they do to bonds.
Rule #3) Moderators of the forum heed this well. Feel free to close this thread if you are uncomfortable with this topic being discussed in your forum. I will begin to post content on this thread in a day or two. If I find this thread closed in a day or two, I will not bring up the subject of investment in these forums again; and you have my apologies in advance.
Note: I am not an expert in this subject. I have been reading about investment recently and I have been trying to wrap my head around the process. In regular Occulus fashion, I will be regurgitating papers, urls, and research. If I say something foolish, please feel free to correct me.
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Comments
I don't like how banks require full car insurance coverage when getting vehicle loans from them. I understand why, but it's still a financial pain in the behind.
I worked at an Investment/Asset Management firm in London for some time, particularly in the Strategic Asset Allocation department. I cannot pretend to understand some of the financial wizardry behind what they do (scarily enough, no one individual understands the entire system, which controls over £100 Bn of assets), but I do have a reasonable overview of the sector.
Get extremely lucky (like with something like bitcoins), or insider trading. :P
Seems damn to useless to me, money sucks when you know we are all doomed.
Anyway, yes. Tell me how to make the $23.45 I have under my mattress into a Porsche. Porsche! Porsche! Porsche!
BTW I am the Lord of Chaos so why would I even need money like mortals do?
911!!!!!! Turbo! Turbo! Turbo!
As for the topic at hand I know nothing about bonds and very little about investments, so I think this will be the last post I make here (just because I don't want this to go off topic).
Solved!
CLUAConsole:AddGold(19999980lbs)
(It looks like all those math questions I got wrong for not putting a unit are starting to effect me:P)
Parenthesis will be used wherever I believe my knowledge to be the shakiest. When I am uncertain about something, I use vernacular and lots of metaphors to describe what I am talking about.
(I am uncertain of the behavior of bonds in practice).
(I have never owned bonds... but I am thinking very seriously about doing so in the future -> after I am certain that I fully understand the risks involved and how to predict the probability of losing the money I put into the bond, I will be talking to financial advisers and bankers in my area about the behaviors of these things)
Square brackets represent data source. [1], [2], etc...
What is a bond?
It is an instrument of debt (kind of like a loan) of the issuer (the fellow who needs a loan) to it's bond holders (the folks who own the bond). (If you always wanted to be on the receiving end of a loan... a bond is a way to do it). [2]
The issuer will put out a bond with a coupon (an interest rate) that will be paid in full by the time the maturity date is reached. [1]
Bond Terminology: [2]
Principal - The amount of money that you, the bond investor puts down. Coupon (or interest rate) is calculated against this.
Maturity - The time you have to wait to get at least 100% of the principal back.
- Short term (bills) -- Maturities between one to five years.
- Medium term (notes) -- Maturities between six to twelve years.
- Long term (bonds) -- Maturities greater than twelve years (mortgages can do this).
Coupon - The interest rate the issuer pays to the bond holder (the investor).
- Fixed -- The interest rate doesn't change throughout the life the the bond.
- Variable -- The interest rate can change with interest rates in the market.
Yield - The rate of return received from investing in the bond. (What you get back)
- Current Yield -- The annual interest payment divided by the market price.
- Yield to Maturity -- A measure of the return of the bond, it takes into account the current market price and the amount of timing of all the repayment due on maturity. (This is where things become very uncertain for me... smart investors care about how much their buying power increases with time, it's not clear to me from this definition how to calculate how buying power changes up to maturity)
- Internal Rate of Return -- Equivalent to "yield to maturity". (Sorry about the recursive definition)
Credit Quality - The probability that the bondholders will receive the amount promised by the time the bond matures.
- High Yield Bonds -- Bonds that are rated below investment grade by credit rating agencies. (These are riskier to invest).
Market Price - The market price is influenced by amounts, currency and timing of the interest payments and the capital repayment due, the quality of the bond, and the available redemption yield of other comparable bonds which can be traded in the market.
Call-ability - Some bonds can be called. This means that the option can be paid back in full before the maturity date
Factors that can effect money/value/loans/bonds:
-- Liquidity of Bond
-- Delinquency Rate (effects the probability of default)
-- Credit Quality
-- Inflation (this changes the buying power of what you put in)
--- (Does the buying power of the money you put into buying a bond change over time? Does the buying power increase, or does it decrease? How does this change when all of the named factors above changes?)
Also, bonds can be taxed. (A general rule of thumb seems to be that Government Bonds are taxed less than Corporate Bonds).
(I have talked to an accountant that I am close to, she is young, so she's not necessary extremely experienced in all facets of tax either (she says as much herself)... but she knows a heck of a lot more than I do: She mentioned that with Bonds it's only the interest generated from the coupons that are taxed by the government. However, I need to independently verify this elsewhere, I trust her; but the devil is in the details behind how taxes works... and it's always changing).
Can all of the above factors be converted into a bare bones mathematical model of the probability of a bond defaulting to within a reasonable level of certainty with error bars? Who are the players that influence all of these factors? Can the players be trusted, and to what degree?
Anyone else think that these things are complicated?
Here is a set of resources that can be used to calculate market data (in theory you could find information about liquidity, default probability, and market practices):
(disclaimer: Try and understand the incentives that drive each of these agencies, this can tell you how well you can trust the statistics they give you. Do you trust public, private, or government entities more? These questions are complex and genuinely difficult to answer.)
(disclaimer: disclaimer:: These agencies are US centric. If you have more examples of what you believe are good places to find market data, I would love to hear about them)
Security and Exchange Commission - http://www.sec.gov/
(US Stocks Cancel to Trade Ratio -- This is a really good example of why this is useful: http://www.sec.gov/marketstructure/datavis/ma_stocks_canceltotrade.html#.UsijY_a3Ooh)
Bureau of Labor and Statistics - http://www.bls.gov/
Here is some history about the SEC:
http://en.wikipedia.org/wiki/Securities_regulation_in_the_United_States
Challenge: Can you detect market corrections between 1900-1995 in the historical data?
Harder Challenge: Can you create a computer program that does the same?
Very Hard Challenge: Can you get the computer program to predict direction of the change?
Even Harder Challenge (probably impossible): Can you get the computer program to predict the onset of the market correction and the direction of the change, accurately?
Here are some information sources, in no particular order:
1. http://www.investopedia.com/terms/b/bond.asp
2. http://en.wikipedia.org/wiki/Bond_(finance)
3. http://www.investinginbonds.com/
4. http://www.marketwatch.com/investing/bonds
5. http://abcnews.go.com/Business/top-tips-investing-bonds/story?id=18294294
6. http://www.foxbusiness.com/economy-policy/2013/11/29/global-investors-brace-for-fed-move-cut-north-american-bonds/
7. http://www.bbc.co.uk/news/business-20425545
(I generally take news sources with several grains of salt)
Now a question, what do you prefer, a seven hundred bucks or a liter of water and some food?
Because I am mortal, I need to eat, I also need to continue to eat till at least 70, my children will also eventually need to eat. And the answer to your question depends on the context and my circumstances at the time. If we have a working economy and a way to buy food from farmers, or a food market. Under the prices at the moment, I would take the 700 dollars... because I can exchange that for far more than "some food and a liter of water".
It would depend on how much, some food is, I guess.
Under a situation of super-inflation. I would take the liter of water and some food. Then I would try and figure out how I could generate more. (Under those conditions, I'd probably try and become a farmer)
To be honest, a working and healthy economy is worth a lot.
Now, on the other hand, why are you giving 700 dollars or some food and a liter of water? Naturally you would expect some work or an item exchanged in return?
And maybe I gave an idea of myself as the Lord of Chaos, but I am a totally Chaotic Lawful 14 years old guy who is considered mad because he does not follow common folk's nature.
Many people try to reach something, but they do not know why. I one only one thing, knowledge, and I know why I want such a thing, something no one ever knew.
What's the point of our lives?
I'm sure that question can"t be answered, or all the answers will be wrong, so my life is totally pointless, giving another wrong answer to that question.
All the shit I posted is philosophy so I should stop posting unrelated things like what I've said.
Except for @Anduin because he is a mummy!
Your idea sounds like a good plan (be careful to not get eaten alive by changing interest rates). For me, I eventually want to start my own software business. I have been looking into the issue of investing lately because those who understand how to do it well seem to do the best financially (case in point: Warren Buffet).
With interest rates on the cusp of looking like they might rise here in the US, I don't know if investing in bonds is a good idea.
(disclaimer: From here is wild speculation and funny-theory from a fellow who is still learning the ropes behind investment (that's me!). You are in no way encouraged to follow these strategies, and you would do so at your own risk.)
What they *do* seem to provide, however is a solution to what I would call the "Greenback Shock-Front" problem. (Just as a dumb example...) Say that you decided to gamble on the power ball, and all of a sudden by a 1 in 177 million chance, you managed to get the big prize of $40 million dollars. Lots of other examples exist too, you decide to create a product and you market the thing well and all of a sudden you have single handedly managed to make $346,000. It can happen, if you're smart, and diligent, and you work hard. So... what do you do with it?
Well... roughly 40% of that goes to Uncle Sam, because without this wonderful community and market that he provides you'd be about as well off as that poor fellow in the desert. So you have $24 million left... which is awesome. But if that goes into your bank... and your bank collapses (not unheard of, with the recession we've seen it happen), you're only ensured for $100,000 if the bank collapses. Now how much would it suck if your bank were to collapse and your $24,000,000 became $100,000? You *could* keep 240 bank accounts, but that seems like special circle of hell; just think of all the junk mail they would give you.
Ways exist to magnify that $24 million into a lot more. Unfortunately, all of the best strategies require being super clever... and doing a ton of homework on how the market works. Well... you could store part of it. Bonds might be one way to store it. Specifically zero-coupon bonds should maintain the value of your investment... and you could store them over a period of time (what this does to your buying power? I am not yet convinced). non-zero-coupon bonds would accrue interest over time, so... that's pretty squiffy.
The main risk with bonds are... if the bond defaults, you lose everything that you put into the bond, so... that's bad.
But there *are* some bonds that have a *very* low risk of default associated with them. Treasury bonds have this behavior, and as long as Senate and Congress don't become manically, bats-in-the belfry Caligula quality crazy; these Treasury Bonds should not default. (Addendum: this *did* happen to Greece... so if you were holding Greek Treasury Bonds, well... you have my sympathy. That is to say, Government issued bonds from all countries can default, structural and systemic corruption is usually the problem that leads to this. Unfortunately, it also wastes money and breaks faith in the market)
You can also invest in Corporate bonds... these have a much higher yield, and have a higher probability of default. How high you ask? Well... to answer that question, you need to ask which industry is this bond coming from? What is the delinquency rate in this industry, and how does this effect the probability of default?
Diversifying your portfolio (which you hear a lot from financial guys) is probably a good idea... so you could put that money into a lot of things to limit the damage from a single asset failing. Stocks come to mind. But I'm not really going to discuss those, because that opens a whole new can of worms, that I'm not prepared to go into. In short... you can make money from them that magnifies over time; you can also lose a lot of money too.
You could invest in real estate. (You need to understand that market, first; like all things you invest in) You could buy small businesses that are turning a nice profit. After you make your first million... the world is your oyster. Unless you are a foolish investor. And so many power ball and lottery winners have been.
It looks like an unlikely scenario, now that I think on it. I don't believe that our economy is 100% corrupt (that doesn't mean that it can't go in that direction, in the future (I don't want it to)). Economies are built on the concept of trust. Ultimately, if you invest in a company long term, you are trusting that the company is going to give you a return on your investment. Or if you take out a bond, then you are trusting that the issuer is not going to default. If you put money into shares of a company in the stock market... that basically means that you believe the company is going to grow. It means that you trust that company's business model, and you believe that it will be successful in the future. If the company is successful... then you will be successful, the money that you put in to help the company will grow.
A company growing is dependent on the market conditions and the savvy of the people in the company. If other, larger companies always sued the smaller companies into nonexistence, then it leaves the larger companies with less competition. But it also means that you could only rely on investing in larger companies to make a profit. (And their value won't increase much after they control the whole market) The only items you would be able to buy would be from the larger companies. Now you have to ask yourself... is this a healthy economy to live in? Do I want all markets to be controlled by monopolies that actively crush all other competition? Where no one can start a business in real estate, or software, or even a donut shop because all those industries already have one company to fill that niche. One where there is only one brand that you can buy food from. Where everyone has to work at one of the monopolies to make money. Where the monopolies can decide to pay people exactly what the monopoly wants.
Depressions and recessions occur when people don't trust other companies to do what they say they will do. When people don't trust each other to offer a return on their investment any more, investment becomes impossible. Hmm... that might be the idea to keep in mind when thinking of what is wrong with the economy.
Actually, if you think about it... if you imagine an economy where 100% of investments are wasted (as in they don't give a positive return on an investment)... would you want to invest in that economy? Wouldn't it be a more useful to throw money into the fireplace, then to invest (oh fire... pretty)? People actually did do this back in WWI, in Germany when hyperinflation was going on. (You know your market is in REALLY bad shape when throwing money in the fireplace for warmth is a better return on your investment than anything else you could spend it on)