Trade Findings and Adjustments 07-21-2022
Kevin what is the problem with Bonds?
60/40 Moderate growth portfolio what does that mean?= 60% stocks and 40% bonds
when do you beat the market? In theory when we have a down market In REAL LIFE = NEVER
Bonds are generally priced at a face value (also called par) of $1,000 per bond, but once the bond hits the open market, the asking price can be priced lower than the face value, called a discount, or higher than the face value, called premium.2 If a bond is priced at a premium, the investor will receive a lower coupon yield, because they paid more for the bond. If it’s priced at a discount, the investor will receive a higher coupon yield, because they paid less than the face value.
Bond prices tend to be less volatile than stocks and they often responds more to interest rate changes than other market conditions. This is why investors looking for safety and income often prefer bonds over stocks as they get closer to retirement. A bond’s duration is its price sensitivity to changes in interest rates—as interest rates rise bond prices fall, and vice-versa. Duration can be calculated on a single bond or for an entire portfolio of bonds.
Jan of 2022 = Roughly prime rate 0.25 plus 0.5 premium $0.75 yearly
You had to invest minimum 10K or 10 bonds worth $1000 face value/Par value WHICH you get back in 10 years
Do you always get your par value back? Not always because companies can go through bankruptcy, cash flow problems
You got paid a coupon of $75 every year for the 10K 10 bond investment
Good investment? Not really, because it doesn’t pay anything especially after fees
So are willing to take more risk in the stock market ?
Safe Investment? Absolutely
Fed interest rates are now set to a range of 1.5 to 1.75 percent, which is much higher than their near-zero setting at the start of 2022 but still probably low enough to stoke the economy.Jul 6, 2022
WHAT IS TODAY’S PROBLEM ?!?!?!!!!!
Problem is January’s sale of bonds was 0.25 + 0.50 premium
Today’s Sale of those same bonds would have to be priced at 1.75 + .50 = 2.25%
SO Today’s bonds pay you three times as much why is Buffett buying those Jan bonds?
This phenomenon is called bond parity
The 10K you spent is Jan is no longer worth 10K
Your par value has to reflect the newer interest rate hikes
Those Jan bonds still have 9 years and a bit left in them
9 * 1.75 = 15.75 % interest paid out with the new bonds
15.75 + 0.25 those bonds 16% * 10 = 1600 of lost bond par value so they trade at $8400