Hello All,
Good to see some discussions relative to bonds and interest rates. In the event anyone is not up to speed on the relationship between interest rates and bond prices, the old teeter toter is a good visual image to remember. Here's a simple illustration:
6% 5,200 Premium Bond
5.5% 5,100 Premium Bond
5% --------0-------- 5,000 Par Value Bond
4.5% / \ 4,900 Discount Bond
3% / \ 4,800 Discount Bond
In this example, let's assume an investor purchases a $5,000 Muni bond with a 10 year life paying 5%. Now, if the holder of this bond never sells, he/she will always be paid 5% and at the end of 10 years get their $5,000 back. But, let's further suppose that AG raises rates a few more times and 10 year Muni's are paying 5.5%. And, this investor must sell the bond because of the plumbing work around the house(g). Well -- just raise the left hand side of the TT up to 5.5% and the other side will drop to $4,900 now becoming a discount bond. Yes, the investor lost money. Conversley, if rates had fallen, this would have become a premium bond and the investor would have made a capital gain.
The ole teeter toter also works well for remembering how two currencies act with each other. Let's use the US dollar (US$) against the Yen.
US$ YEN
150 150
125 125
100 100YEN-------O-------$100US 100
75 / \ 75
50 / \ 50
The left side of the TT represent 100Yen and the right side $100 US dollars. The left column represents US Dollars and the right column Yen. Let's further assume we're a money changer, and currently $100 US dollars can be converted to 100 Yen and vi sa versa.
Now, because of (you pick the reason) the US$ drops against the Yen, then lower the right side of the TT to say, 75, which raises the left side to $125. This means you can now exchange $100 US Dollars for only 75 Yen, but they can convert 100 Yen to $125 US Dollars. In this example, the Yen buys more US product and the US Dollar buys less Japanese product.
So, if the Japan decides to buy up their own currency, what happens?
Take care,
Eric |
