One of the most confusing components of “bond math” is the pricing. Like most assets – the price is a major determinant of your total return. Today we look at the pricing of fixed income instruments and how your total return is calculated. We present several concepts that are simplified for brevity and all examples use a fixed rate security.
The dominance of the US dollar has been a hot topic in recent weeks. The consensus is that in the long term there may be a trend toward currency diversification. However, the dollar losing its reserve status will not occur any time soon. As mentioned, investors should not look to immediately exit their US dollar denominated investments.
In a globalized economy, the use of a single dominant currency allows for ease and efficiency of trading between countries. With each country having their own currency, trading with multiple partners is more difficult when having to pay for goods and services from each trading partner in varying currencies. The single dominant currency needs to be one that is stable and can easily be bought and sold. For over 60 years, the United States dollar has taken on this role and had been the world’s primary reserve currency used for global trading.
In times of economic uncertainty, investors tend to flee to fixed-income securities such as bonds to protect their investments. This is because bonds are considered safer investment options that provides stable returns, especially during a recession. In this article, we will explore why bonds perform well during a recession and the factors that contribute to their success.
A healthy lifestyle and financial independence are two of the most important goals that people strive to achieve. By achieving financial independence, you will not only have greater control over your future but also the freedom and flexibility to pursue your own passions and interests.
For new investors the process of buying bonds can be complex, as it involves various terminologies and buying scenarios. Today, we will discuss buying bonds at a premium versus a discount. Let’s start at the beginning, when a bond is issued, it is available for purchase at its face value, which is the amount of money the issuer promises to repay bondholders at maturity. The face value of a bond is fixed and is also known as the par value.
Buying Bonds at Premium
As we approach the end of the first quarter of 2023 uncertain market conditions continue to prevail. Right on the heels of the failure of Silicon Valley Bank we saw where Credit Suisse was acquired by UBS. Investors will have to continue to navigate choppy waters and analyze their portfolios. It’s never been more important to make sure your money is working as hard as possible for you. In the current environment with rising interest rates an investor may wonder what to do when their fixed income investment matures.
The only cure for a crisis of confidence and anxiety is an improved understanding of the events that are occurring. We do not need to have a firm grasp of the complexities of every accounting rule on a bank’s balance sheet to make prudent decisions. This article tries to provide readers with a basic understanding of what happened in the banking sector (particularly with Silicon Valley Bank and Credit Suisse) recently. It is not exhaustive and technical details have been omitted for the sake of brevity and simplicity.
