Daily Catholic Mass - 2019-02-13 - Dcn Gerald

Strategic Organizational Communication in a Global Economy (part 3) 02/11 by CharlesXLamson | Management Podcasts

Strategic Organizational Communication in a Global Economy (part 3) 02/11 by CharlesXLamson | Management Podcasts: 'I think for any relationship to be successful, there needs to be loving communication, appreciation, and understanding.' -Miranda Kerr

Personal Financial Planning: An "How-To" Guide (part 54)

Retirement Planning: Estimating Income Needs
by
Charles Lamson

The combined impact of when you start your program, how much you contribute each year, and the rate of return you earn on your investments is seen in Exhibit 1 (below). Note that it is really the combination of these three factors that determines the amount you will have at retirement. Thus, you can offset the effects of earning a lower rate of return on your money by increasing the amount you put in each year or by lengthening the period over which you build up your retirement account---meaning that you start your program earlier in life (or work longer and retire later in life). The table shows that there are several different ways of getting to roughly the same result; that is, knowing the kind of nest egg you would like to end up with, you can pick the combination of variables (period of accumulation, annual contribution, and rate of return) that you are most comfortable with.

Retirement planning would be much simpler if we lived in a static economy. Unfortunately (or perhaps fortunately), we do not, and as a result, both your personal budget and the general economy are subject to considerable change over time. All of which make accurate forecasting of retirement needs difficult at best. Even so, it is a necessary task, and one you can handle in one of two ways. One strategy is to plan for retirement over a series of short-run time frames. A good way to do this is to state your retirement income objectives as a percentage of your present earnings. For example, if you desire a retirement income equal to 80 percent of your final take-home pay, you can determine the amount necessary to fund this need. Then, every 3 to 5 years, you can revise and update your plan.

Alternately, you can follow a long-term approach in which you actually formulate the level of income you would like to receive in retirement, along with the amount of funds you must amass to achieve that desired standard of living. Rather than addressing the problem in a series of short-run plans, this approach goes 20 or 30 years into the future---to the time when you will retire---to determine how much saving and investing you must do today to achieve your long-run retirement goals. Of course, if conditions or expectations should happen to change dramatically in the future (as they very well could), it may be necessary to make corresponding alterations to your long-run retirement goals and strategies.


Determining Future Retirement Needs

To illustrate how future retirement needs and income requirements can be formulated, let's consider the case of Jack and Lois Spellman. In their mid-thirties, they have two children and an annual income of about $60,000 before taxes. Up to now, Jack and Lois have given only passing thought to their retirement. But even though it is still some 30 years away, they recognize it is now time to give some serious consideration to their situation to see if they will be able to pursue a retirement lifestyle that appeals to them. Worksheet 1 provides the basic steps to follow in determining retirement needs. This worksheet shows how the Spellmans have estimated their retirement income and determined the amount of investment assets they must accumulate to meet their retirement objectives.

Jack and Lois began their calculation by determining what their household expenditures will likely be in retirement. Their estimate is based on maintaining a "comfortable" standard of living---one that will not be extravagant yet will allow them to do the things they would like in retirement. A simple yet highly effective way to derive an estimate of expected household expenditures is to base it on the current level of such expenses. Assume that the Spellmans' annual household expenditures (excluding savings) currently run about $42,000 a year---this information can be readily obtained by referring to their most recent income and expenditures statement. Making some obvious adjustments for the different lifestyle they will have in retirement---their children will no longer be living at home, their home will be paid for, and so on---the Spellmans estimate that they will be able to achieve the standard of living they would like in retirement at an annual level of household expenses equal to about 70 percent of the current amount. Thus, in terms of today's dollars, their estimated household expenditures in retirement will be $42,000 x .70 = $29,400. (This process is summarized in steps A through D in Worksheet 1.)



Estimating Retirement Income

The next question is: Where will they get the money to meet their projected household expenses of $29,400 a year? They have addressed this problem by estimating what their income will be in retirement---again in terms of today's dollars. Their two basic sources of retirement income are Social Security and employer-sponsored pension plans. Based on today's retirement tables they estimate that they will receive about $13,000 a year from Social Security (you can receive an estimate directly from the Social Security Administration of what your future Social Security benefits are likely to be when you retire) and another $9,000 from their employer pension plans, for a total projected annual income of $22,000.                     When this is compared to their projected household expenditures, it is clear the Spellmans will be facing an annual shortfall of $7,400 (see steps E through I in Worksheet 1). This is the amount of retirement income they must come up with; otherwise, they will have to reduce the standard of living they hope to enjoy in retirement.

At this point we need to introduce the inflation factor to our projections in order to put the annual shortfall of $7,400 in terms of retirement dollars. Here we make the assumption that both income and expenditures will undergo approximately the same average rate of inflation, causing the shortfall to grow by that rate over time. In essence, 30 years from now, the annual shortfall is going to amount to a lot more than $7,400. How large it will grow to will, of course, be a function of what happens to inflation. Assume that the Spellmans think inflation, on average, over the next 30 years will amount to 5 percent---while that is a bit on the high side by today's standards, the Spellmans decide to use it anyway as they would rather overestimae the effects of inflation than underestimate them.


Funding the Shortfall

The final two steps in this estimation process are to determine (1) how big the retirement nest egg must be to cover the projected annual income shortfall, and (2) how much to save each year to accumulate the required amount by the time the Spellmans retire. To find out how much money they need to accumulate by retirement, they must estimate the rate of return they think they will be able to earn on their investments after they retire. This will tell them how big their nest egg will have to be by retirement in order to eliminate the expected annual shortfall of $32,000. Let's assume that this rate of return is estimated at 10 percent, in which case, the Spellmans must accumulate $320,000 by retirement. This figure is found by capitizing the estimated shortfall of $32,000 at a 10 percent rate of return: $32,000 / .10 = $320,000 (see steps M and N). Given a 10 percent rate of return, such a nest egg will yield $32,000 a year: $320,000 x .10 = $32,000. And so long as the capital ($320,000) remains untouched, it will generate the same amount of annual income for as long as the Spellmans live and can eventually become a part of their estate.

Now that the Spellmans know how big their nest egg has to be, the final question is: How are they going to accumulate such an amount by the time they retire? For most people that means setting up a systematic savings plan and putting away a certain amount each year. The appropriate interest factor is a function of the rate of return one can (or expects to) generate and the length of the investment period. In the Spellmans case, there are 30 years to go until retirement, meaning that the length of their investment period is 30 years. Because the Spellmans must accumulate $320,000 by the time they retire, the amount they will have to save each year (over the next 30 years) can be found by dividing the amount they need to accumulate by the appropriate interest factor; that is $320,000 / 113.3 = $2,824 (see steps O to Q in Worksheet 1).

The Spellmans now know what they must do to achieve the kind of retirement they want: Put away $2,824 a year and invest it at an average annual rate of 8 percent over the next 30 years. If they can do that, they will have their $320,000 retirement nest egg in 30 years. Of course, they could have been more aggressive in their investing and assumed an average annual rate of 10 percent, in which case, either they would end up with a bigger nest egg at retirement, or they could get away with saving less than $2,284 a year. Now, how they actually invest their money so as to actually achieve the desired 8 (or 10) percent rate of return will, of course, be a function of the investment vehicles and strategies they use. All the worksheet tells them is how much money they will need, not how they will get there; it is at this point that investment management enters the picture.

The procedure outlined here admittedly is a bit simplified and does take a few shortcuts, but considering the amount of uncertainty imbedded in the long-range projections being made, it does provide a viable estimate of retirement income and investment needs. The procedure certainly is far superior to the alternative of doing nothing. One important simplifying assumption in the procedure, though, is that it ignores the income that can be derived from the sale of a house. The sale of a house not only offers some special tax features but can generate a substantial amount of cash flow as well. Certainly, if inflation does occur in the future (and it will), it will very likely drive up home prices right along with the cost of everything else. A lot of people sell their homes around the time they retire and either move into smaller houses (often in Sun Belt retirement communities) or decide to rent in order to avoid all the problems of homeownership. Of course, the cash flow from the sale of a house can have a substantial effect on the size of the retirement nest egg. However, rather than trying to factor it into the forecast of retirement income and needs, we suggest that you recognize the existence of this cash flow source in your retirement planning, and consider it as a cushion against all the uncertainty inherent in retirement planning projections.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 598-603*

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Personal Financial Planning: An "How-To" Guide (part 53)

MUTUAL FUNDS: SOME BASICS
by
Charles Lamson

For individual investors today, mutual funds are, without a doubt, the investment vehicle of choice. The fact is, more people invest in mutual funds than any other type of investment product. The reason they are so popular is that they offer not only a variety of interesting investment opportunities, but also a wide array of services that many investors find appealing. They provide an easy and convenient way to invest, and are especially suited to beginning investors and those with limited investment capital. A mutual fund is basically a financial services organization that receives money from its shareholders and invests those funds on their behalf in a diversified portfolio of securities. Thus, when investors buy shares in a mutual fund, they actually become part owners of a widely diversified portfolio of securities. In an abstract sense a mutual fund can be thought of as the financial product that is sold to the public by an investment company. That is, the investment company builds and manages a portfolio of securities and sells ownership interests---shares of stock---in that portfolio through a vehicle known as a mutual fund. This concept underlies the whole mutual fund structure and is depicted in Exhibit 1.

The Mutual Fund Concept

The first mutual fund in this country was started in Boston in 1924; by 1940, there were 68 mutual funds in operation, and by 1980, there were 564. There are now well over 15,000 funds available. To put this number in perspective, there are more mutual funds in existence today than there are stocks listed on the New York and American exchanges combined! The fund industry has grown so much, in fact, that it is now the largest financial intermediary in this country---ahead of even banks.

In mid-2017, an estimated 56.2 million households, or 44.5 percent of all US households, owned mutual funds. The current estimate of the number of individual investors owning mutual funds is 100.0 million (https://www.ici.org/faqs/faq/mfs/faqs_mf_shareholders). Clearly, mutual funds appeal to a lot of investors---investors who come from all walks of life and all income levels. And they all share one common view: They have decided for one reason or another, to turn the problem of security selection and portfolio management over to professional money managers. Questions of which stock or bond to select, when to buy, and when to sell have plagued investors for about as long as there have been organized securities markets. Such concerns lie at the very heart of the mutual fund concept and, in large part, are behind the growth in funds. The fact is, a lot of people simply lack the time, the know-how, or the commitment to manage their own securities. As a result, they turn to others. And more often than not, that means mutual funds.

US Household Ownership of Mutual Funds
Millions, selected years

*Sources: Investment Company Institute and US Census Bureau*

smart.sites Want to know more about the fund industry, from the funds themselves to fund investors and legislation affecting funds? The Investment Company Institute Web site (www.ici.org) has all the answers.

Pooled Diversification

The mutual fund concept is based on the simple idea of turning the problems of security selection and portfolio management over to professional money managers. In essence, a mutual fund combines the investment capital of many people with similar investment goals, and invests the funds in a wide variety of securities. Investors receive shares of stock in the mutual fund and, through the fund, are able to enjoy much wider investment diversification than they could otherwise achieve. 

No matter what the size of the fund, as the securities held by it move up and down in price, the market value of the mutual fund shares moves accordingly. And when dividend and interest payment are received by the fund, they too are passed on to the mutual fund shareholders and distributed on the basis of prorated ownership. For example, if you own 1,000 shares of stock in mutual fund and that represents, say, 1 percent of all shares outstanding, you would receive 1 percent of the dividends paid by the fund. When a security held by the fund is sold for a profit, the capital gain is also passed on to fund shareholders. The whole mutual fund idea, in fact, rests on the oncept of pooled diversification, and works very much like insurance, whereby individuals pool their resources for the collective benefit of all the contributors.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 550-552*

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Personal Financial Planning: An "How-To" Guide (part 52)

The Bond Market
by
Charles Lamson
                                                                           

According to The Motley Fool, the global bond market has more than tripled in size in the past 15 years and now exceeds $100 trillion. By contrast, S&P Dow Jones Indices put the value of the global stockmarket at around $64 trillion (https://www.fool.com/knowledge-center/5-bond-market-facts-you-need-to-know.aspx). Given such size, it is not surprising that today's bond market offers securities to meet just about any type of investment objective and suit virtually any type of investor, no matter how conservative or aggressive. As a matter of convenience, the bond market is usually divided into four segments, according to type of issuer. Treasury, agency, municipal, and corporate.

Treasury Bonds
Treasury bonds (sometimes called Treasuries or government) are a dominant force in the bond market, and if not the most popular, certainly are the best known. The U.S, Treasury issues bonds, notes, and other types of debt securities as a means of meeting the ever increasing needs of the federal government. All Treasury obligations are of the highest quality (backed by the full faith and credit of the U.S. government), a feature that, along with their liquidity, makes them extremely popular with individual and international investors, both here and abroad. U.S. Treasury securities are traded in all the major markets of the world, from New York to London to Tokyo.

Treasury notes are issued with maturities of 2, 3, 5, and 10 years, whereas Treasury bonds carry 20- and 30-year maturities (Note that while the treasury is authorized to issue these securities, the last time they issued 20-year bonds was in January 1986 and the last 30-year bond was issued in August 2001. Even so, many of these bonds are still outstanding and actively traded in the secondary market.) All treasury notes and bonds are sold in minimum denominations of $1,000, and although interest income is subject to normal federal income tax, it is exempt from state and local taxes. Also, the Treasury today issues only noncallable securities---the last time the U.S, Treasury issued callable debt was in 1984.



In 1997, the Treasury began issuing its newest security, the Treasury inflation-indexed bond---or TIPs as they are also known, which stands for "Treasury Inflation-Protection Securities." Basically, these securities---which are issued as notes with 10-year maturities, and until 2001, as bonds with 30-year maturities---provide investors with the opportunity to stay ahead of inflation by periodically adjusting their returns for any inflation that has occurred. That is, if inflation is running at an annual rate of, say, 3 percent, then at the end of the year the par (or maturity) value of your bond will increase by 3 percent (actually, the adjustments to par value are done every six months). Thus, the $1,000 par value will grow to $1,030 at the end of the first year and if the 3 percent inflation rate continues for the second year, the par value will once again move up, this time from $1,030 to $1,061 (or $1,030 x 1.03). Unfortunately, the coupons on these securities are set very low, as they are meant to provide investors with so-called real (inflation-adjusted) returns. Thus, one of these bonds might carry a coupon of only 3.5 percent (at a time when regular T-bonds are paying, say, 6.5 or 7 percent). But there is an upside even to this: The actual size of the coupon payment will increase over time as the par value on the bond goes up. For investors who are concerned about inflation protection, these securities may be just the ticket. These securities are a lot more complex than your normal Treasury bonds.


Agency Bonds

Agency Bonds are an important segment of the U.S. bond market. Though issued by political subdivisions of the U.S. government, these securities are not obligations of the U.S. Treasury. An important feature of these securities is that they customarily provide yields comfortably above the market rates for treasuries, and, therefore, offer investors a way to increase returns with little or no real difference in risk. Some of the more actively traded and widely quoted agency issues include those sold by the Federal Farm Credit Bank, the Federal National Mortgage Association (or "Fannie Maes," as they are more commonly known), the Federal Land Bank, the Student Loan Marketing Association, and the Federal Home Loan Bank. Although these issues are not the direct obligation of the U.S. government, a number of them actually do carry government guarantees and thus effectively represent the full faith and credit of the U.S. Treasury. Moreover, some have unusual interest-payment provisions (interest is paid monthly in a few instances and yearly in one case), and, in some cases, the interest is exempt from state and local taxes.

smart.sites If bonds are still a mystery to you, the Bond Market Association’s “Investing in Bonds” site (www.investinginbonds.com) has a wealth of practical and educational tools and useful links.

Municipal Bonds

Municipal bonds are often the issues of states, countries, cities, and other political subdivisions, such as school districts and water and sewer districts. They are unlike other bonds in that their interest income is unusually free from federal income tax (which is why these issues are known as tax-free bonds). Note, however, that the same tax-free status does not apply to any capital gains that may be earned on these securities---that is, such gains are subject to the usual federal taxes. A tax-free yield is probably the most important feature of municipal bonds and is certainly a major reason why individuals invest in them. The higher the individual's tax bracket, the more attractive municipal bonds become.

As a rule, the yields on municipal bonds are (almost always) lower than the returns available from fully taxable issues. Thus, unless the tax effect is sufficient to raise the yield on a municipal to a yield that equals or exceeds the yields on taxable issues it obviously does not make sense to buy municipal bonds. You can determine the return a fully taxable bond would have to provide in order to match the after-tax return on a lower-yielding tax-free issue by computing what is known as a municipal's fully taxable equivalent yield:

Municipal bonds are generally issued as serial obligations meaning that the issue is broken into a series of smaller bonds, each with its own maturity date and coupon rate. Thus, instead of the bond having just one maturity date 20 years from now, it will have a series of, say, 20 maturity dates over the 20-year time frame. Although it may not seem that municipal issuers would default on either interest or principal payments, it does occur. Investors should be especially cautious when investing in revenue bonds, which are municipal bonds serviced from the income generated from specific income-producing products, such as toll roads. Unlike issuers of so-called general obligation bonds---which are backed by the full faith and credit of the municipality---the issuer of a revenue bond is obligated to pay principal and interest only if a sufficient level of revenue is generated. General obligation municipal bonds, in contrast, are required to be serviced in a prompt and timely fashion regardless of the level of tax income generated by the municipality.

Caution should be used when buying municipal bonds because some of these issues are tax-exempt and others are not. One effect of the far-reaching Tax Reform Act of 1986 was to change the status of municipal bonds used to finance nonessential projects so their interest income is no longer exempt from federal taxes. Such bonds are known as taxable munies, and they offer yields considerably higher than normal tax-exempt securities. Buy one of these issues and you will end up holding a bond whose interest income is fully taxable by the IRS.

Corporate Bonds

The major nongovernmental issuers of bonds are corporations. The market for corporate bonds is customarily subdivided into several segments, which include industrials (the most diverse of the group), public utilities (the dominant groups in terms of volume of new issues), rail and transportation bonds, and financial issues (banks, financial companies, and so forth). The corporate bond market offers the widest range of issue types. There are first mortgage bonds, convertible bonds, debentures, subordinated debentures, and income bonds, to mention just a few. Interest on corporate bonds is paid semiannually, and sinking funds are common. The bonds usually come in $1,000 denominations and are issued on a term basis with a single maturity date. Maturities usually range from 5 to 10 years, to 30 years or more. Many of the issues---particularly the longer-term bonds---carry call provisions that prohibit prepayment of the issue during the first 5 to 10 years. Corporate issues are popular with individuals because of their relatively high yields.

*SOURCE: PERSONAL FINANCIAL PLANNING, 10TH ED., 2005, LAWRENCE J. GITMAN, MICHAEL D. JOEHNK, PGS. 526-530*

end

smart.sites

If bonds are still a mystery to you, the Bond Market
Association’s “Investing in Bonds” site
(www.investinginbonds.com) has a wealth of
practical and educational tools and useful links.

Strategic Organizational Communication in a Global Economy (part 2) 01/20 by CharlesXLamson | Management Podcasts

Strategic Organizational Communication in a Global Economy (part 2) 01/20 by CharlesXLamson | Management Podcasts: 'Communication - the human connection - is the key to personal and career success.' -Paul J. Meyer

• 1st half - Masonic Secrets: Analysis of the Secret Teachings of All Ages by Manly P. hall (part A) 

• 2nd half - Analysis of Organizational Communication in a Global Economy

The Work Of A God: Lourdes, The Oversized Sanctuary

Personal Financial Planning: An "How-To" Guide (part 51)

INVESTING IN BONDS
by
Charles Lamson

In contrast to stocks, bonds are liabilities---they are nothing more than publicly traded IOUs where the bondholders are actually lending money to the issuer. They represent borrowed funds, and as such are a form of debt capital. Bonds are often referred to as fixed-income securities because the debt service obligations of the issuer are fixed---that is, the issuing organization agrees to pay a fixed amount of interest periodically and to repay a fixed amount of principal at or before maturity. Bonds normally have face values of $1,000 or $5,000, and maturities of 10 to 30 years or more.

Why Invest in Bonds

Like many other types of investment vehicles, bonds provide investors with two kinds of income: (1) They provide a generous amount of current income, and (2) they can often be used to generate substantial capital gains. The current income, of course, is derived from the interest payments received periodically over the life of the issue. Indeed, this regular and highly predictable source of income is one of the key factors that draws investors to bonds. But these securities can also produce capital gains, which occurs whenever market interest rates fall. A basic trading rule in the bond market is that interest rates and bond prices move in opposite directions: when interest rates rise, bond prices fall; and when they drop, bond prices rise. Thus, it is possible to buy bonds at one price and, if interest rate conditions are right, to sell them some time later at a higher price. Of course, it is also possible to incur a capital loss should market rates move against the investor. Taken together, the current income and capital gains earned from bonds can lead to highly competitive investor returns.

Bonds are also a highly versatile investment outlet. They can be used conservatively by those who seek high current income, or aggressively by those who actively go after capital gains. Although bonds have long been considered as attractive investments by those going after high levels of current income, it has only been since the advent of volatile interest rates that they have also become recognized for their capital gains potential and as trading vehicles. Indeed, given the relationship between bond prices to interest rates, investors found that the number of profitable trading opportunities increased substantially as wider and more frequent swings in interest rates began to occur.

Finally, because of the general high quality of many bond issues, they can also be used for the preservation and long-term accumulation of capital. In fact, some individuals, regularly and over the long haul, commit all or a good deal of their investment funds to bonds because of this attribute.

Bonds vs. Stocks

Although bonds definitely do have their good points---low risk and high levels of current income, along with desirable diversification properties---they also have a significant downside: their comparative returns. The fact is, relative to stocks, there is a big sacrifice in returns when investing in bonds. 

However, bond returns are far more stable than stock returns, plus they possess excellent portfolio diversification properties. Thus, except for the most aggressive of investors, bonds have a lot to contribute from a portfolio perspective. Indeed, as a general rule, adding bonds to a portfolio will---up to a point---have a much bigger impact on (lowering) risk than it will on return. Face it: You don't buy bonds for their high returns (except when you think interest rates are heading down); rather, you buy them for their current income and the stability they bring to a portfolio. 


Basic Issue Characteristics

A bond is a negotiable, long-term debt instrument that carries certain obligations on the part of the issuer. Unlike the holders of common stock, bondholders have no ownership or equity position in the issuing firm or organization. This is so because bonds are debt, and the bondholders, in a round-about way, are only lending money to the issuer.

As a rule, bonds pay interest every 6 months. The amount of interest paid is a function of the coupon, which defines the annual interest that will be paid by the issuer to the bondholder. For instance, a $1,000 bond with an 8 percent coupon would pay $80 in interest every year (i.e., $1,000 x 0.08 = $80), generally in the form of two $40 semiannual payments. The principle amount of a bond, also known as par value, specifies the amount of capital, that must be repaid at maturity---thus there is $1,000 of principal in a $1,000 bond.

Of course, debt securities regularly trade at market prices that differ from their principal (or par) values. This occurs whenever an issue's coupon differs from the prevailing market rate of interest; in essence, the price of an issue will change until its yield is compatible with prevailing market rate of interest; in essence, the price of an issue will change until its yield is compatible with prevailing market yields. Such behavior explains why a 7 percent issue will carry a market price of only $825 when the market yield is 9 percent; the drop in price is necessary to raise the yield on this bond from 7 percent to 9 percent, the drop in price is necessary to raise the yield on this bond from 7 percent to 9 percent. Issues with market values lower than par are known as discount bonds and carry coupons that are less than those on new issues. In contrast, issues with market value in excess of par are called premium bonds and have coupons greater than those currently being offered on new issues.


Types of Issues

A single issuer may have any number of bonds outstanding at a given point in time. In addition to their coupons and maturities, bonds can be determined from one another by the type of collateral behind them. In this respect, the issues can be viewed as having either junior or senior standing. Senior bonds are secured obligations, because they are backed by a legal claim on some specific property of the issuer that acts as collateral for the bonds. Such issues include mortgage bonds, which are secured by real estate, and equipment trust certificates, which are backed by certain types of equipment and are popular with railroads and airlines. Junior bonds on the other hand, are backed only with a promise by the issuer to pay interest and principle on a timely basis. There are several classes of unsecured bonds, the most popular of which is known as a debenture. Issued as either notes (with maturities of 2 to 10 years) or bonds (maturities of more than 10 years), debentures are totally unsecured in the sense that there is no collateral backing them up---other than the good name of the issuer. But in the final analysis, even in the world of corporate finance, that is all that matters.



Sinking Fund

Another provision that is important to investors is the sinking fund, which stipulates how a bond will be paid off over time. Not all bonds have these requirements, but for those that do, a sinking fund specifies the annual repayment schedule that will be used to pay off the issue and continue annually thereafter until all or most of the issue has been paid off. Any amount not repaid by maturity (which might equal 10 to 25 percent of the issue) is then retired with a single balloon payment.


Call Feature

Every bond has a call feature, which stipulates whether a bond can be called (that is, retired) prior to its regularly scheduled maturity date, and, if so, under what conditions. Often, a bond cannot be called until it has been outstanding for 5 years or more. Call features are normally used to replace an issue with the one that carries a lower coupon; in this way, the issuer benefits by being able to realize a reduction in annual interest cost. In an attempt to compensate investors who have their bonds called out from under them, a call premium (usually equal to about a half to one year's interest) is tacked on to the par value of the bond and paid to investors, along with the issue's par value, at the time the bond is called. For example, if a company decides to call its 12 percent bonds some 15 years before they mature, it might have to pay $1,000 for every $1,000 bond outstanding (a call premium equal to 9 months' interest---$120 x .75 = $90---would be added to the par value of $1,000).

Although this may sound like a good deal, it's really not. Indeed, the only party that benefits from a bond refunding is the issuer. The bondholder may indeed get a few extra bucks when the bond is called, but in turn, he or she loses a source of high current income---for example, the investor may have a 10 percent bond called away at a time when the best he or she can do in the market is maybe 7 or 8 percent. To avoid this, stick with bonds that are either noncallable (these issues cannot be called or retired prior to maturity, for any reason), or that have long call-deferment periods, meaning they cannot be called for refunding (or any other purpose) until the call-deferment period ends.

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Daily Reading for Thursday, January 17th, 2019 HD

Analysis of Business Communication Today (part 1) 01/15 by CharlesXLamson | Art Podcasts

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The Rant - This Is Propaganda: The Wonderful World of Public Relations (part 4) 01/14 by CharlesXLamson | Art Podcasts

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