Beruflich Dokumente
Kultur Dokumente
BACHELOR OF COMMERCE
Financial markets
SEMESTER V (2012-13)
ROLL NO. 45
V.E.S. COLLEGE OF ARTS, SCIENCE & COMMERCE, SINDHI SOCIETY, CHEMBUR, MUMBAI 400071
CONTENTS:
Strip Bond meaning. What are strip bonds. How do strip bonds work. What if I need to sell my Strip Bond before maturity. What about taxes. How do I buy strip bonds. A great investment to meet long term objective. Flexibity. Guaranteed return. Advantages. Disadvantages. Conclusion.
Strip Bonds
For the investor seeking safety of principal with a guaranteed return, Strip Bonds are an ideal investment choice.
basic tax implications and characteristics of Strip Bonds, is automatically sent to all clients upon completion of initial purchase and is available to others upon request.
FLEXIBILITY?
Strip Bonds have no minimum investment amount requirement and are available in increments of $1.00. As well, many Strip Bonds are available in sizeable amounts. Thus Strip Bonds suit the needs of both large and smaller investors.
GUARANTEED RETURN?
The return on a Strip Bond investment is based on internal, semi-annual compounding. The total return to maturity of the Strip Bond can be easily determined and guaranteed at the time of purchase.
Advantages
You know what the return on your investment will be if you hold it to maturity
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If you bought the strip bond with a yield of 5%, you will earn that 5% each year until the strip bond matures
You know the amount that you will receive at maturity (except for indexed stripped bonds)
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If the strip bond has a face value of 10,000, you will receive 10,000 at maturity, in whatever the currency units are If the strip bond is indexed, the maturity value is normally adjusted by the index If yields on the strip bond fall after you purchase it, the value of your strip bond will increase, resulting in a capital gain - which in many countries is taxed at more favourable rates than interest income
You may be able to realize a capital gain, instead of interest income, if interest rates fall
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You may have possible tax savings by holding a series of strip bonds instead of a conventional bond from the same issuer that has the same cash flows
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On strip bonds, most countries require that you report the return based on the yield annually. So if the yield is 5%, on a $2,000 strip bond, you would report the accrued interest income annually. But if you bought a bond with a 10% coupon rate, you would report $100 interest income annually and then have a capital loss at maturity. In a case such as this, depending on your tax situation, it may be better to purchase a series of strip bonds that replicate the cash payments of the bond itself.
Disadvantages
Because the market for strip bonds can be illiquid, you may not be able to sell them when you want to
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Because many strip bond issues are traded much less frequently than the underlying bond, the secondary market for strip bonds is not as active. Therefore traders tend to offer lower prices for strip bonds on the secondary market, as they may have more difficulty reselling the strip bond to another investor.
If you sell before maturity, you may have a capital loss, depending on market conditions at the time
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If interest rates (yields on bonds) have risen since the time you purchased the strip bond, it is possible that you would receive less than you paid (plus any interest you earned on the strip bond since the purchase)
Tax laws may require that you pay taxes related to the hypothetical interest or gain each year, even if you did not receive an actual cash payment
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Since you do not receive annual payments on strip bonds, you may have to use other funds to pay the taxes each year.
Because many strip bonds have a long time horizon, there could be unforeseen changes that adversely affect your investment (e.g., changes in tax laws, issuer credit rating, etc.)
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For example, the credit ratings on some sovereign issuers changed significantly in 2010 (e.g., Greece, Spain). This means that the price of any strip bonds for those governments would have fallen significantly as well.
Conclusion
Now you know the basics of bonds. Not too complicated, is it? Here is a recap of what we discussed:
Bonds are just like IOUs. Buying a bond means you are lending out your money. Bonds are also called fixed-income securities because the cash flow from them is fixed. Stocks are equity; bonds are debt. The key reason to purchase bonds is to diversify your portfolio. The issuers of bonds are governments and corporations. A bond is characterized by its face value, coupon rate, maturity and issuer. Yield is the rate of return you get on a bond. When price goes up, yield goes down, and vice versa. When interest rates rise, the price of bonds in the market falls, and vice versa. Bills, notes and bonds are all fixed-income securities classified by maturity. Government bonds are the safest bonds, followed by municipal bonds, and then corporate bonds. Bonds are not risk free. It's always possible - especially in the case of corporate bonds - for the borrower to default on the debt payments. High-risk/high-yield bonds are known as junk bonds. You can purchase most bonds through a brokerage or bank. If you are a U.S. citizen, you can buy government bonds through Treasury Direct. Often, brokers will not charge a commission to buy bonds but will mark up the price instead.