by The Investor
on January 10, 2009
In normal times, corporate bonds are the also-rans of the asset class world. They’re sometimes sexed-up, such as in the 1980s when Wall Street raiders used junk bonds to fuel company takeovers. But usually they’re too boring to interest private investors.
Boring can be profitable, but only if the underlying risk/return case is good. In my personal view, that’s rarely true of corporate bonds. (Many financial advisors and writers think different).
Corporate bonds:
- Offer none of the income growth of equities
- Are still exposed to the risk of company failure
- Don’t adequately diversify the risk of holding equities
- Aren’t anything like as secure as government bonds (governments can print money to pay their debts)
- Yield only 0.5-1.5% more than government bonds (in normal times!)
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by The Investor
on January 9, 2009
An asset is an item of economic value that can be converted into cash.
Assets likely to be held by private investors include: cash in bank deposits, securities (such as shares issued by private companies, and government or corporate bonds), property, insurance policies, foreign currencies, cars, art and antiques.
Company assets include plants and machinery, and intellectual property.
Different assets have different characteristics. Variables include:
- Liquidity – how easily can the asset be converted into cash?
- Rate of return – does holding the asset generate a cash income? Gold bars don’t give you an annual income. Shares in a large-cap diversified mining company typically do.
- Potential for capital appreciation – stocks and property tend to rise in value over time. Cash does not.
- Volatility – how does the asset’s value fluctuate over a given time period?
An investor’s requirements regarding these different characteristics will determine which assets are most attractive to him or her.
See more financial terms in the Monevator glossary.
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by The Investor
on January 7, 2009
Back in March 2008, I asked if rising interest rates at Zopa, the British peer-to-peer lender, were an opportunity for cash-rich savers or an accident waiting to happen:
In the A*, 24-month market, I seem to be in the zone with an interest rate of 10.5%, which Zopa estimates will give me 9.5% after bad debt.
That 9.5% is almost 50% more interest than on the best savings accounts available from banks at the moment.
I’m gob-smacked.
My post generated a few comments around the web. Even Zopa joined the discussion on the Zopa blog:
Johnnie Moore pointed us towards Monevator and a recent post about Zopa, and we thought it contained some food for thought. […]
Our default rate remains at less than 0.1% and we’ve seen no evidence of increasing bad debt. With our state-of-the-art credit and affordability checks, we’re confident that our credit process will continue to perform well.
So, sit back, relax and have a really nice relaxing biscuit and tea filled weekend!
Zopa was right. Nearly 10 months on I’m yet to see any bad debt. I’ve had a few late-payers but so far Zopa’s credit control has proved impressive and they’ve all coughed up.
Reminder: Zopa is a peer-to-peer lending platform. Rather than saving money in a bank, you effectively become a bank yourself, spreading your money between other Zopa members who are borrowers and who pay you interest. Think eBay for savings.
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by The Investor
on January 1, 2009
The Annual Percentage Rate (APR) enables you to compare the costs of different loans.
Mandatory use of the APR was introduced in the UK in the Consumer Credit Act of 1974, which said that the APR must be the most prominent rate or charge published in marketing or other material for all regulated loans
APR is given as a percentage. This is the annual cost you will pay for your loan in percentage terms.
As well as the percentage rate, the lender must also give you details such as how long the period of repayments will last for, and often you will have to make payments.
In practice it may be more complicated because certain costs may or may not be included in the APR.
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