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Home | Getting Started | Personal Finance | Q & A | Sample Portfolio | Glossary | About Us |
| Date: Monday 15th 2010f March 2010 01:34:51 AM |
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Q & A - Losing Money in Bond Investing - 04/23/2009 |
| By: Hari Wibowo |
| Name: Josh |
| Website: N/A |
| Date posted: Thur, April 23, 2009 |
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Question:
I am
having a lot of difficulty with RBA bond parcels. Can you please explain how it is possible that an investor can make or lose money on fixed interest investments.
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| Answer: |
| Hi, Josh. For bond investing, there are two ways investors can lose money. One is when the bond issuer (in this case, RBA) failed to repay the principal at the maturity date. Second is when the purchase price of the bond itself is way above its par value (> 100). At the day of the maturity, the value of the bond itself will be back to its par value (= 100). |
| To determine the purchase price of an RBA 10 year bond, we need to figure out what is the yearly coupon given per $ 100 worth of bond. Say, it is giving $ 7. If current yield rate is 8.95% p.a., then the bond would be priced at ($7 / 0.0895) = $ 78.21. It the yearly coupon is $ 10 per $ 100 worth of bond, then the bond would be price at ($ 10/ 0.0895) = $ 111.73. This is an example of the second way of losing money in bond investing. The bond is maturing within 250 days. Meanwhile, you will be collecting interest rate of $ 10 within those time period. As the bond approached its maturity date, RBA will repay the principal at par value ( = $ 100). Therefore, the bond investor will obtain $ 100 (principal) + $ 10 (interest) = $ 110. Meanwhile, he is paying for $ 111.73 on the above example. Therefore, the bond investor is losing $ 1.73 in this case. |
| Hari - Novice Investing |
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END |
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Hmm, I am confused. And I have questions |
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I'm fine, thanks. Bring me back to main page |
| Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding any securities. |
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