Here’s how the rule of 72 works

•Want to double your money?

•To figure out how much you need to earn each year compounded annually to make your money double, divide 72 by the number of years you plan to double it at:

3 years = 24.0%
4 years = 18.0%
5 years = 14.4%
6 years = 12.0%

The corporations and governments that issue bond all want to raise money from investors, though not for the same reasons. Corporations often need large amounts of cash to finance growth and development. The issuers believe that the borrowed money will help build the business and help increase their earnings, and the increased earnings will be available to repay the loans. (more…)

The life or term of any bond is fixed at the time of issue. It can range from short-term intermediate-term to long term. Government bonds usually come in the form of treasury bills(one year or less), treasury notes(2 to 10 years) and treasury bonds(10 to 30 years). Generally speaking, the longer the term, the higher the interest rate that’s offered to make up for the additional risk of tying up money for so long a time. The relationship between the interest rates paid on short-term and long-term bonds is called the yield curve.

When inflation is up, interest rates go up and when inflation is low, so are interest rates. It’s the change in interest rates that causes bond prices to move up or down.

If a government issued bonds offering 6% interest, it seems like a good deal; so you buy some bonds at the par value price of $2000. Two years later, interest rates are up. If new bonds costing $2000 are paying 8% interest, no buyer will pay you $2000 for a bond paying 6%. If you want to sell your bond you’ll have to offer it at a discount, or less than you paid. If you must sell, you might have to settle for a price that wipes out most of the interest you’ve earned.

But if new bonds selling for $2000 offer only a 3% interest rate, you’ll be able to sell your 6% bonds for more than you pay. Since buyers will agree to pay more to get a higher interest rate.

The value of a bond is determined by the interest rate it pays and by what’s happening in the economy. A bond’s interest rate never changes eventhough other interest rate do. If the bond is paying more interest than is available elsewhere, investors will be willing to pay more to own it. If the bond is paying less, investors won’t buy it unless you sell it at a bargain price or lower than the value of the bond. Interest rates and bonds prices fluctuate like two sides of a seesaw. When interest rates drop, the value of existing bonds usually goes up. When rates climb, the value of existing bonds usually falls. (more…)