Essay About Enormous Loss And Canada Savings Bonds

Executive
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Bonds
Given todays uncertain economy, many people are taking time to examine various
options for their financial future. Different types of investments are investigated and
bonds are one of the more popular choices considered. Many of the same people who talk
about investing in bonds, however, do not fully understand them nor where they place in
the economy. Many individuals believe that they should simply buy a bond and wait until
it matures before cashing it in. These people fail to realize that they may be losing a lot
of money due to the fluctuation of bond prices. At some point it may be more profitable
for them to sell their bond than to keep it until the payment date is reached.
There are many people who do not understand what bonds really are. A bond is an
agreement between two separate entities. One of these bodies gives, to the other, use of
their money for a period of time and, in return, may receive a “bond”. The bond issuer
agrees to a fixed rate of return which he will pay the supporting person or business. This
fixed rate of return is an amount, in percentages, which is paid at regular intervals until
some future specified time ( the “maturity date”). Upon reaching the maturity date, ones
original investment is returned to them.
As previously mentioned, bonds are one of the more popular types of financial
investment in todays economy. There are many reasons why people invest in bonds. For
example, if one chooses a stable and profitable bond, it will provide a steady source of
income through interest payments during the lifetime of the bond. As well, the risk when
investing in a bond is considerably less than for most other forms of investment. The
bond does not, for instance, experience the volatility of a stock on the stock market, like
many other forms of investment do. Also, in instances where the issuer fails to pay the
principal amount back to the bond holder, legal recourse is available. Furthermore, in
cases of bankruptcy within large corporations with stock holders, bond holders take
priority and are guaranteed payment before stockholders.
During the past forty five years, bonds have experienced their ups and downs. As shown
in the chart on the following page, the return rate on bonds has surpassed the inflation
rate. Bonds have averaged an interest rate of over six and a half percent, while the
inflation rate has averaged under four and a half percent. Although it may seem like an
insignificant amount of interest, over time, this difference in interest rates can lead to
extremely large profits. If you invested $1 000 dollars in bonds in 1950, by the end of
1995 you would have acquired $17 630. While according to the Consumer Price Index
(the cost of living rate), you would only need $7 000 to have the same buying power that
you would have had in 1950. That is a difference of $10 630 in purchasing power that
you would have gained. This increase in purchasing power seems very significant;
however, you must also realize that these profits do not include the numerous times when
you could have sold out of your bond for an even greater return. You must also realize
that the large difference between bonds and stocks is not fairly represented as well.
Although the stocks show a $79 750 increase over the inflation rate, you must keep in
mind that stocks carry a lot more risk than bonds do; this volatility could lead to an
enormous loss in money if your money is not invested in the right companies.
Let us now examine the various types of bonds available. When people consider
investing in bonds they should be aware of their choices and what each different
possibility means to them. As with mutual funds and other forms of financial investment,
there are many different types of bonds available on the market. Each individual, when
considering bonds, must decide which of type of bond is best suited to him. Some bonds
provide a stable income from interest earned and must be kept in the form of a bond until
maturity, while others give the bearer an the option of whether or not he or she would
like to trade the bonds in for common stock.
Canada Savings Bonds are labeled as “government bonds”, however, in comparison to
regular bonds, their characteristics differ. One advantage of Canada Savings Bonds is
that, unlike most bonds on the market, their prices do not fluctuate with interest rates or
credibility ratings. Another advantage that Canada Savings Bonds have is the stability of
their value. At any time, a holder of Canada Savings bonds may cash their bonds and
receive face value for them. One difference which might be considered a downfall
between Canada Savings Bonds and regular bonds is that the federal government
guarantees the interest rate of the bond for the first year only, with annual adjustments