| Another source of change is tax-law changes--for example, if the
alternative minimum tax gets changed, some investors might not
realize as much benefit from so-called "tax-free" bonds. They
thus would stop buying such bonds, reducing demand and so causing
the price to go down.
The market being what it is, all that's necessary for changes in
bond values is for tax-law changes to be discussed!
If you need _all_ your money in three years or less, your desired
yield of 6% might be impossible to get; if you can take some more
risk with some of the money you might do better on yield (with of
course the risk of losing that fraction).
Gold funds don't necessarily go exactly counter to interest rates,
alas, so that might not be the right way to go. They have a lot
of inherent political risk as well, if any of the underlying stocks
are in South Africa.
One option I'd be tempted to explore is buying stock plus selling
calls and buying puts, but I suspect that the transaction costs
would eat you alive, and you'd have some risk (though you could
pick your level of risks). The idea would be something like this:
Capital:
buy 200 shares of X at 50 -- $10,000
Every three months:
sell 2 calls for X at 55 -- $ 1,000
buy 2 puts for X at 40 -- ($ 500)
monthly profit ------------- $ 500
As the calls and puts expired, you'd buy new ones, picking
calls with strike prices closer than the strike prices of the
puts so as to balance your "yield" against the risk of a stock
price drop and subsequent loss of the diffence between the
purchase cost and the put price.
For an idea of the practicality of this approach, you'd have
to look at real numbers for a volatile stock with good option
liquidity.
-John Bishop
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I have recently read in different publications that junk bonds and
municipals will not suffer as much as other bonds (e.g. govt,
corporate, zeroes) if the interest rate creep up.
The rationale they present is that muni's will be supported by high
demand especially once people finish their 1993 taxes and see how much
more taxes they have to pay. For junk bonds, they argue that the
underlying quality of the junk bond will be more important than the
interest rate movements.
I am concerned about all bonds right now because of the potential
interest rate spikes. Yet I would like to invest some money in higher
yielding investments, with lower risks that stock funds. Thus the
interest in bond funds.
Do you think munis and junk bond funds would be a good investment at
this time? Or, should I park the money in a "income" stock fund like
Lindner Dividend? Or, should I just leave the money in a tax free Money
Market Fund. Again, my goal was 5-6% interest for money I will need in
2-3 yrs (for purchase of a new house).
thanks,
/Pedro
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| re: .2
On the contrary, junk bonds and municipals may be more sensitive to
interest rate changes that other bonds, all other things being equal.
Junk bonds, in general, gain/lose more than investment grade bonds for
the same interest rate swing. However, an improving economy may help
junk bonds more than investment grade bonds. But predicting how the
economy will do is no easier than predicting how interest rates will
move.
Municipals tend to be longer-term bonds, and long-term bonds have more
interest rate risk than short term bonds.
In general you will find that the bond market accurately prices bonds.
That is, a higher yielding bond almost certainly comes with a higher
degree of risk.
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