[Search for users] [Overall Top Noters] [List of all Conferences] [Download this site]

Conference nyoss1::market_investing

Title:Market Investing
Moderator:2155::michaud
Created:Thu Jan 23 1992
Last Modified:Thu Jun 05 1997
Last Successful Update:Fri Jun 06 1997
Number of topics:1060
Total number of notes:10477

450.0. "Transfer Zero coupon bonds to IRA?" by NODEX::BRASS () Wed Apr 14 1993 14:11

Hi,

	If, for whatever reasons I have, I decide to take some zero coupon 
bonds and sell them, then invest the money in an IRA, How much do I stand
to lose or how bad an idea is this.

The bonds are now worth about $5000 - $6000 and in about 10 years they
mature to $24000. They have about a 9% yield or interest or whatever you call it.

How much does an IRA pay on the average? I would not have to pay taxes on the 
at this point unless they change the tax law.

Also how do you calculate the interest on an investment. For example
if I buy something(bonds or whatever) for $2000 and it has a 9% interest 
rate, how do I calculate what it would be worth in a year or two or ten?
		Thanks
		Bob
T.RTitleUserPersonal
Name
DateLines
450.1VMSDEV::HAMMONDCharlie Hammond -- ZKO3-04/S23 -- dtn 381-2684Wed Apr 14 1993 19:4348
>The bonds are now worth about $5000 - $6000 and in about 10 years they
>mature to $24000. They have about a 9% yield or interest or whatever you call 
>it.

    If the numbers above are correct then the actual return you'll get 
    over the next 10 years is something in th 15-16% range.  IRAs pay 
    anywhere from 2-3% in a money market account to whatever you can
    get from a well managed investment.  However, if these bonds are
    sound -- i.e. not likely to default -- then you have a "sure thing"
    in hand that is *WELL* above the averate IRA expectation.  Even 
    considering tax consequences, you would need to show me a very 
    good reason to sell them for the purpose of funing an IRA.
    
    (Don't forget -- you can put only $2000 per year into an IRA.)
    
>Also how do you calculate the interest on an investment. For example
>if I buy something(bonds or whatever) for $2000 and it has a 9% interest 
>rate, how do I calculate what it would be worth in a year or two or ten?

    First realize that the the INTEREST RATE stated on the bond 
    don't mean very much in terms of your ACTUAL RETURN.
    
    To calculate your return solve the following.
    
        FUTURE VALUE = PRESENT VALUE * ((1+i)^n)

    FUTURE VALUE can be the FACE VALUE that you'll receive in ~10 years.
    PRESENT VALUE is market value of the bond today.
    i is the interest, expressed as a decimal. (i.e. 9% = .09)
    n i the number of years you hold the investment -- ~10 in this case.
    
    If you solve this for a $24,000 future value, a $5-6000 current value,
    and 10 years, i comes out to ~15-16%.
    
    If your original purchase price was MORE than $5-6000, then using a
    greater present value and a period longer than 10yers would come out
    to a LOWER return -- maybe nearer to the nominal 9%.  If this were
    the case it would say that you've lost money on these so far.  But
    if your number are right, I think you should ignore that loss and
    hold onto what has now become a very nice investment.
    
    On the other hand, if these bonds are really going to pay you $24,000 
    in ~10 years then it is probably that either (1) their current market
    value is more than $5-6000, or (2) they are quite risky.  Either of
    these would change the hold/buy analysis. (1) would reduce the expected
    future return, and (2) would raise questions about your risk tolerance 
    -- should you take your loss now rather than accepting this level or
    risk.
450.2Getting near a peak in bondsVMSDEV::HALLYBFish have no concept of fireThu Apr 15 1993 12:1114
    There's no way to make the kind of prediction you seem to be asking for
    in .0 -- IRA's have returns all over the place, just like most investments.
    In fact, a zero-coupon bond is a relative rarity in that it offers a
    known nominal yield.  You don't get that for stocks.
    
    One important question, since you "know" your bonds are worth $24K in
    10 years, is what will $24K buy in 10 years?  A new car?  A new TV?
    A new toaster?  A toasted ham sandwich?  All of the above?
    
    I think now is a good time to sell bonds and dioversify into natural
    resource stocks -- oil&gas, gold&silver, paper&copper.  Not with all
    of your money, but part of it.
    
      John
450.3NODEX::BRASSThu Apr 15 1993 15:317
Thanks for your replies. Sorry the info is sketchy. I would never actually sell 
them unless I had to.I don't know much about zero coupon bonds or bonds in 
general. They were a gift a long time ago. They originaly cost $2000 and when 
they mature which is around 20 years from when they were purchased, they will be 
worth $24000. On the statements they use to send me it had an average yield of 
9%. 
		Bob
450.4time for zero coupon bondsMSBCS::HURLEYTue Sep 19 1995 12:313
    With interest rates where they are and my prediction that over the next
    year or two that they will go down what are the thoughts out there
    about buying into some zero coupon bonds short term? (2-3 years?)
450.5Benham has zero coupon fundsASDG::HORTONpaving the info highwayWed Sep 20 1995 16:3413
    Richard Band, editor of Profitable Investing, advised his readers to
    get into zeros in Oct/Nov '94 and has been touting them ever since.
    He thinks long term interest rates have more to fall.  For people
    who are still "underweighted" in bonds (less than 50 percent of
    holdings) he recommends putting up to 20 percent into Benham Target
    Maturities Trust of 2020, a zero coupon fund (800-321-8321).  Band
    thinks shares in this fund will rise another 10 to 15 percent before
    year's end.  Symbol for the fund is BTTTX.
    
    Your mileage may vary.
    
    -Jerry