Why do folks insist on staying in this scam???????????? Staying in and taking a smaller loss on a negative yield bond. HAAAAAAAAAAAAAAAAA I got a great trading strategy for ya, GET THE F^&*()_+k out, hold cash. And IF this scam ever gets called out, then resume your normal ways. Man this thinking just does not compute to me......
Negative Bond Yields
I received a great question from a reader. He noted that a few weeks ago, news articles about the financial panic stated that short term Treasury Bills had negative yields for a brief time. He could not quite understand this, and thought perhaps that it was a mistake. Take a dividend paying stock, he said. The yield you get on it is the annualized dividend payment divided by the purchase price. The lowest it can be is zero, and that's when the stock doesn't pay dividends. A negative yield means you're paying someone else money, and that just doesn't make sense.
The reader is absolutely right about stock dividend yields. They cannot be lower than zero (ok, so this isn't necessarily true either. Example: you own a business. It gets into some trouble and is sued. The court rules against you, but your business doesn't have enough capital to pay the judgment. In certain cases--when the judge is angry, basically--the court can "pierce the corporate veil." The shareholders can be held liable and be forced to pay up. I doubt this would ever happen with a stock you buy on one of the major exchanges. Another example is just a vocabulary distinction--it depends on what you mean by yield. I discuss this below.) With bonds, on the other hand, yields can be negative and you end up losing money, even when you hold to maturity.
There are two types of bonds, those that have a coupon and those that don't. The coupon is the interest the bond pays. The face value of the bond is the sum the bond holder will receive when the bond matures. So, for example, when a bond with the face value of $1,000 matures, the debtor will pay the bond holder $1,000.
Bonds without coupons are typically sold below face value. For example, a bond with the face value of $1,000 is sold for $900. When the bond matures, the bond holder receives $1,000. He gets a return of $100, or an 11.11% gain. The yield on this bond, we can say, is 11.11% (if you factor in time in years when calculating the yield, you may get a different answer. Suppose you get that 11.11% gain in a month. Your annualized, non-compounded return is actually 133.32%. Or say you get that return over two years. Your yield on that bond is 5.55%).
But suppose the bond is in great demand (because of its safety, etc) and investors are willing to pay more than $1,000 for it. When it matures, they get $1,000. Since they paid more, then end up losing money, and the bond has a negative yield. Suppose they paid $1,100 for it. The yield is negative 10% (for a holding period of a year).
The short term Treasury Bills (maturities range from a few days to one year), or T Bills, have no coupon and usually sell below face value. Their return, upon maturity, is the difference between purchase price and face value. Panic striken investors were willing to pay slightly more than face value, recently. They preferred losing a known amount of money in the safety of Treasury Bills than possibly lose everything if the financial system suddenly collapsed. The newspapers were not in error when they reported that yields on short term Treasuries were slightly negative.
Bonds that have coupons, that is, bonds that pay
http://www.slackerwealth.com/2008/10/negative-bond-yields.html
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
| 