Things to Know about Bonds

November 7th, 2012

Bonds are securities issued by state agencies and organizations, local governments and corporations. In other words, issuers are various government institutions. In this article we are going to be exploring characteristics of bonds and what a trader should know about them.

To begin with, there are different types of bonds. They are classified according to their issuing bodies, the length of time before maturity and a variety of other factors and conditions of issuance.

Following that, almost all bonds entitle the bondholder only to receive revenue in the form of fixed interest rate, but carry no right to participate in the management of the company, as it happens in the case of purchasing shares.

Another important point is when a bond reaches maturity; a seller will pay its full face value to the investor who purchased it. The most important information, including nominal value, maturity period and coupon rate is shown on the front of each bond, so it would be impossible to change it.

And last but not least, the purchase of bonds available to anyone with Internet access. Through trading terminals you can find stock information on each issue.

As an investment tool, bonds are considered to be more secure as compared to bank deposits and stocks, because you can control your expenses and revenues. Also interest rates are lower compared with banks and other creditors. It is not necessary to wait for bond maturity; you can sell the security in the secondary market. In this case, the price will depend on the bond yield at the moment of sale and on interest rates. If current market interest rates are greater than the rates of recent bond issues, the coupon rate will be also higher; therefore, the bonds could be sold at a better price. However, when interest rates fall in the country, the market price of old bond issues will be reduced considerably.

What Ifs for the 2012 Election

November 7th, 2012

As the two nominees still lay in deadlock on the on-going election, many are eagerly waiting for the results. According to the latest news, Obama is gaining advantage on winning the election but the key states results are yet to announced. Some polling states are still open and there may be some delays especially on the states where Sandy struck the most. For the meantime, I thinks better to contemplate on the “what ifs” of this election.

What if Romney wins?

An indeed a successful businessman, no one can doubt Mitt Romney’s capability as a businessman. He was donned with the business knowledge and skills from the prestigious Harvard University and has proven his worth in the corporate world through his Bain Capital.

But many are in doubt to whether he can put his business theories into reality. Moreover, certain individuals are also pessimistic in the application of his business theories into political arena. It seems that he has invested more effort in this campaign rather than in his experience on managing the state of Massachusetts, warding an impression of a less experienced political candidate than his competitor.

If in case he is elected, he have to deal with a congress, divided by difference in ideals unlike his business group, which may really give him a hard time. Also, being a less experience candidate may have its toll once he won the seat. Unlike Obama who already handled the rein in the past four years, Mitt Romney will start from the scratch in governing the most influential and most powerful country in the world. The health care programs of Obama will most probably terminated and the Bush cut tax for the wealthy may be made permanent according to some. He also must be prepared to face the issue about Iran’s nuclear material.

What if Obama wins?

Some of his supporters may have been waned off this past few years but most still have their faith on the first African-American president. Obama talks about the withdrawal of troops in Afghanistan and building educational program. But the plans may be hindered by the budget. After winning the election, the health care plans will probably push through and so are the pressing concern over Iran’s nuclear materials. Similar to Romney’s case. He has plenty of issues to handle if he would regain that White House seat of his.

Conclusion


In my opinion, I think its better if Obama wins. The experience and agenda are really two important factors to this election. But I hope that it won’t hurt much if the new kid in the block will be given the chance to steer the wheel.

Stephen Stevenson

Global Economy, Five Red Flags for Investors

October 31st, 2012

The IMF warns of so-called “dangerous new phase” which reflects instability of global economy and impossibility of long-term planning. Such circumstances as cut of Italy’s credit rating, crisis of 2008, European economy woes, and search for money for French fragile banks make investments unsound way of money use. Investors give up believing in the abilities of major international institutions in their attempts to save the situation during perilous times as they have started to apply non-traditional measures which consequences are hard to predict. The governments are struggling to restore confidence in the budget to save world economy from collapse. Meanwhile, investors lack healthy playing field and they have to look for the signs which will guide them throughout world economy turmoil and help to guess its further direction moves. We will touch upon 5 most important aspects which signify about changes in the world of finance.

1. Rate of Growth for the Third Quarter

Second quarter was a subject to mounting concerns for investors as it could trigger new recession. However, stability in the third quarter is a reason for optimism as it is connected with the peculiarities of May-June data. Automotive industry is bottoming out; price for oil is going down. Thus, we can expect some improvements in global economy. Nevertheless, new crisis began in the third quarter on financial markets; Eurozone debt crisis has hit Great Britain as well and resulted in mass riots. In such a way, encouraging data for the third quarter could initiate economic stabilization but nobody can give a hundred per cent guarantee.

2. Eurozone Debt Crisis

Eurozone debt crisis has started in Greece, which is why the further scenario depends on Greece. Eurozone economy could be forced back into recession. Central bank can cut its interest rate in the short term. In October the ECB will be ruled by a new chairman which will definitely lead to new changes.

3. Central Banks

Currently, central banks do not have that power over economic situation on the whole as they used to have. Central banks of developed countries take a passive approach using their scant tools instead of helping the global economy which is significant of new economical woes.

4. Markets

The markets also reflect the high probability of recession indicating the burning issues. Investors are hesitating putting up the capital.

5. The U.S. policy

It is quite true that the USA has a great power. But even such powerful economic state cannot find the right solution for this teetering situation in the country and worldwide. Barack Obama suggests a new $447 bn plan. In general, it is aimed to trigger some relief and reduce taxes for companies. Nevertheless, the U.S. politics is actively trying to solve global economic problems.

Understanding the Fundamentals | Producer Price Index

October 25th, 2012

Almost all products, before landing into our very own hands, goes through a lot of process. Along those processes, are changes in its price. The basic framework goes like this: semi-products are first gathered and transported to manufacture or producer, after which it will be assembled or putted on together by the laborers to come up with a finished product. The finished product will be displayed and sold on the market afterward.

PPI takes into account all of this through its weighted index of prices. It is done through a wholesale level and consists of three major sub-categories: initial, intermediate, and final.

PPI Commodity Index (Initial) – changes on the average price of commodities( for the previous month are displayed in here.

PPI Stage of Processing (intermediate) – the current prices of the goods that had gone through certain level of processing which will be passed on to the producer for the final output are reflected in here.

PPI Industry Index (final) – this is the source of the core PPI and reflects the price for the finished products.

The first two sub categories are followed due to its capability to reflect inflationary or deflationary pressures. Meanwhile, most investors follow the third because it reflects the prices of the goods which will be for sale to the consumers. But the apple of the eye for the investors are the core PPI which is published along with the main index. Core PPI is a byproduct of the finished goods index minus the energy and food components.

Though the monthly PPI cannot affect the market reaction, its annual data are under the watchful eyes of the analysts mainly because PPI gives a sneak-peek of the CPI (Consumer Price Index). It will later on validated after the latter is released. As we all know, CPI is the inflation indicator which is very important in fundamental analysis.

Stephen Stevenson

Central Banks and Their Activities

October 24th, 2012

Being the country’s largest bank, Central bank regulates the national economy climate and creates conditions for its successful development. Central banks of different countries can be called state, national, reserve or issuing.

Since Central banks deal with global movement of cash between different financial institutions, their activity greatly affects the currency rates fluctuations. Financial market by virtue of its dynamic reflects whatsoever is happening in the form of exchange rate variations.

Thus, Central bank is an active market participant: it intervenes in the foreign exchange market in order to set the reserve requirement, stabilize the benchmark interest rate and maintain the current fiscal policy.

The major banks having impact on global economy are considered to be:

-The Federal Reserve System, the Fed. It was established on December 23, 1913 as independent financial body which fulfills the functions of central bank and exerts control over the US commercial banking system. The FED activity is carried out by presidentially appointed Board of Governors. The Federal Reserve is comprised of 12 Reserve banks, the major of which, Bank of New York, is responsible for foreign financial relations.

- The European Central Bank, the ECB. This organization was created on June 1, 1998. Its main office is located in Frankfurt am Main, Germany and consists of representatives of all Euro area countries. The ECB was founded with the purpose of providing price stability within European monetary union by means of HICP growth by 2% annually (but not more than that). The ECB is discussing economic conditions, fiscal policy, and set the interest rates on its meetings.

-Bank of England (Old Lady of Threadneedle Street). Was established in 1694. In 1946 the BoE was nationalized and became an independent public organization in 1997. Its primary function is to develop financial system of Great Britain and ensure its stability.

-Swiss National Bank, SNB. Despite other banks, SNB does not apply refinance rate in order to regulate the rate of national currency. It controls fiscal policy in Switzerland and has a high level of independence.

-Japan Ministry of Finance and its Central bank is the most important political and fiscal organization in the country which can influence the market. It is even more powerful than the U.S., Great Britain, and Germany Treasury Departments. The decisions made by Japan Ministry of Finance affect the global economy and predetermine USD/JPY rate.