In my last post about the power of compound interest, I gave you an example about the difference between simple and compound interest. And that compound interest can give you higher return by reinvesting your earned interest to earn more interest. In this post, I would like to give you (more…)

“The most powerful force in the universe is compound interest”

-Albert Einstein

If you are serious about saving or investing your money, you should understand compound interest. But if you think you’re not yet ready to enter the investment world, and you think that you still have to wait 3 or 5 more years before you start saving money, then I guess you’re the one who really needs to understand the power of compound interest. (more…)

The basic guideline in investing is the country’s inflation rate. All your savings for the long term, time deposits and other investments must produce rates that are higher than inflation. Your earnings rate should be 2 to 4 percent above inflation rate. So, if the inflation rate is 6%, your earnings rate should be 8 to 10%. Otherwise, you will lose a great deal of money especially if you invest for the long term. (more…)

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.