Archive for the ‘Finance’ Category
Money makes the world go around they say, although we don’t agree entirely with it, money is needed in almost everything we do! And when it comes to running a business, money is something you should never ever run out of! Unexpected events happen, and without cash that you can pull out, there is a huge chance your business will fail. And failing is not an option, unless you are willing to let your investments go down the drain without a fight?
However, what is the best way to avoid these financial emergencies? The answer would be getting a Business Finance. With a Small Business Finance, you can have someone to rely on when short term money problems are starting to build up! In cases where you did not anticipate of getting a Small Business Finance, you could still avail at the spur of the moment! With about 1 to 3 days of approval and 7 – 10 days of release of funding, your business can still put up a good fight! Find the best Small Business Financing companies in the internet, and never worry about your business failing due to financial problems! With financial help from the best, you’ll be able to concentrate on other important aspects of your business!
For years, people like my friend Jim and his father sank their money into cash-equivalent investments, also known as liquid assets, because of how easily they could be traded in for cash. (If you need a visual aid, just think of how easily liquids pour from one container to another.) What would you guess they made on these ultrasafe investments that they could so easily jump back out of? You guessed it: not much.
The return you receive on your cash-equivalent investment depends entirely on the existing interest rate. If interest rates are low (a good thing if you’re trying to borrow money), you’re not going to make as much. In any case, you’re not going to see a great return with these investments. They are essentially where you park either money you’re planning to use in the near future, or your emergency reserve. What kinds of investments are appropriate for this emergency reserve category?
If all bonds were created equal, choosing among them would entail little more than comparing yields. But in truth they are far from equal, which is why they are rated on their credit quality by major rating services like Moody’s and Standard & Poor’s.
Bond ratings are based on the likelihood that the bond’s issuer will default, failing to repay its obligation to investors. The highest-quality bonds receive a rating of AAA from Standard & Poor’s (Aaa from Moody’s). At the other end of the spectrum, bonds rated DDD or lower by S&P are already in default. As you might guess, lower-quality bonds generally offer higher returns as an incentive for investors to purchase them in spite of their higher level of risk.
Bonds rated BBB or higher by Standard & Poor’s (Baa or higher by Moody’s) are considered “investment grade”—that is, appropriate for consideration of purchase by prudent investors. Bonds with ratings below this threshold are considered noninvestmentgrade or “junk.” Junk bonds offer higher yields but are considered to be highly speculative investments due to the company’s risk of default.
Actually, this inverse relationship makes perfect sense. When current interest rates go down, bond buyers will pay more for an existing bond that yields 6% than they will for a new bond that yields only 5%. And on the flip side, if interest rates go up, a buyer will pay less for an old bond that is carrying a lower yield than the bonds that are now being released. Here’s an example of how bond prices reflect the going yields. In June 2003 the yield on a five-year Treasury note with a face value of $1,000 was about 2.5%. But if you went out to buy a bond released several years ago yielding about 5%, you’d have to pay $1,100. Because current rates went down, the price of an older bond with a higher yield went up.
This effect is most pronounced for long-term bonds. When interest rates rise, the price of a 5% bond that won’t mature for twenty years (in other words, a bond that will continue to yield 5% every year for twenty years) will fall more than a 5% bond that will mature in five years. And when interest rates fall, the price of a long-term bond will increase more than the price of a short-term bond.
During the last bull market, a newspaper editor I know became increasingly frustrated with his father, who stubbornly refused to add a single stock to his portfolio, which was 100% invested in bonds. At seventy-two, he simply wasn’t interested in doing a thing that might jeopardize his retirement savings. To him, bonds, bonds, and more bonds were the answer.
So what’s a bond?
Simply put, bonds are like IOUs. When you buy a bond, you’re essentially loaning money to the government or to a corporation. In return, you get regular income in the form of interest payments (thus the term fixed income) as well as the promise that your entire investment will be returned when the bond matures. In theory, if you buy a $10,000 bond that pays a 5% yield and matures in March 2009, you will receive annual income of $500 until March 2009, at which time the original $10,000 investment will be returned.
Notice that I said “in theory.” As a category, bonds fall somewhere between cash-equivalent investments (such as CDs or money market mutual funds) and stocks on the risk/reward continuum. In general, you get higher yields from bonds than from cash investments, but you don’t have the same potential for growth that comes with stocks. Depending on the bond you purchase (with U.S. government bonds on the safe end of the spectrum and riskier, higher- yield corporate bonds on the other), you also assume more risk with bonds than you do with cash investments. This includes the risk of default as well as the risk that rising interest rates will erode the bond’s value. Nonetheless, bonds are generally less volatile than stocks—provided they are high-quality issues that you hold until maturity. But if you deviate from this reliable strategy and start to trade bonds—or sell them prior to maturity—you are assuming a higher level of risk.