Posts filed under 'Money Management'
Why do companies issue bonds? If they need money, why don’t they just go to a bank and borrow it? There are a few reasons, but the main reasons are that borrowing from a bank can be very restrictive and very expensive—more expensive than selling a bond to the general public. In other words, banks are usually more conservative when it comes to investing than people are. (Unfortunately, this is not always true—I wish they had been more conservative before making all those home loans that could never be repaid.)
So it costs a company more to borrow from a bank than it costs them to borrow from you. Plus, when a company borrows money from a bank, the bank often tells them what they can and can’t do with their money. The banks give the company lots of rules, which are called covenants. For example, a bank might tell a company that the money can only be spent on one thing, like operations and not on expansion. Or the bank might say that if the present head of the company leaves the company, all of the money is due back to the bank immediately. Or the bank might tell a company how much cash it must keep on hand at all times. Sometimes the bank requires the company pay back the loan too quickly for the purposes the company is raising money for, like building a new plant.
Companies can find these rules stifling. So, instead of going to a bank for a loan, a company will issue a bond through the bond market. (Think of a bond market as a huge shoe store—where you can buy all different kinds of shoes. In the bond market, you can buy all different kinds of bonds.)
Company bonds are typically issued in 1,000 or 5,000 dollar increments. These increments are called the face value. Face Value really refers to your principal—the amount of money you paid for the bond. The face value has to be paid back to you within a set time frame, called a maturity. The time period in which the face value must be paid can vary from as little as 30 days to as long as 30 years and anywhere in between—there are bonds with even longer maturity dates than 30 years, but they are rare. But typically a bond’s maturity is seven to ten to fifteen years in the future.
Generally in exchange for borrowing your money and issuing you a bond (which is the piece of paper or contract that describes the terms of the loan), a company will periodically pay you interest. Interest is the fee the company pays you for borrowing your money and is no different from the interest the bank pays you. When interest is paid from a bond rather than from a bank, it is called a coupon. To reiterate, a coupon payment is conceptually no different from the interest the bank pays you for leaving your money in a savings account. And, just like with a treasury, the longer the company borrows your money, the higher the interest rate because the longer you are agreeing to tie up your money.
So, when a bond is issued, the bond issuer (the company borrowing the money) determines how much money they need to borrow, the total value of each individual bond (principal), how long they need to borrow the money for (maturity), and the fee they are willing to pay to borrow the money (interest rate or coupon).
August 7th, 2009
Just as flats are a sensible and versatile shoe for women, corporate bonds can a sensible and versatile investment for the beginning investor. A corporate bond is a loan to a company for a set period of time. If you have been reading this blog then you already know all about them – they are pretty much the same as US Treasuries. The exact same explanations and logic apply except that corporate bonds (or “Corporates”) aren’t guaranteed by the US Government. Rather, they’re guaranteed by the particular corporation from whom the bond is purchased. Therefore, they are a bit riskier than treasuries but, as a result, pay a bit more in interest (a “higher return”). (Remember, the lower the risk, the lower the return; the higher the risk, the higher the return.)
When you buy a corporate bond, you agree to loan your money to a particular company, rather than the US government, in exchange for interest payments that the company will make to you. You can buy corporate bonds from a lot of different companies (lots of different types of companies sell bonds), for example Microsoft or AT&T. Buying a corporate bond is considered riskier (less safe) than buying a treasury or savings bond. Why? Because treasuries and savings bonds are backed by the US government while a corporate bond is backed only by the particular company from whom the bond is purchased. And, unlike to government, a company can’t print more money or raise taxes to pay its debts.
Just like with treasuries, the company that issues the bonds you buy will return your money (your initial investment) plus the interest you’ve earned (the company selling the bond sets the interest rate at the time they issue their bond) once the bond has run its course at a later set date (maturity).
Usually you receive your interest rate payments in the form of checks, sent out within a set time frame, often semi-annually. Then, when the loan matures, you receive the full amount of your original loan back. The original amount you loan the company is called the “Principal”.
Company bonds usually refer to loans that are longer than one year, but like the US government, corporations can also issue shorter term loans. These shorter term company loans are called “Commercial Paper”.
More corporate bonds tomorrow.
August 5th, 2009
Some women believe that a sound financial plan is to marry well. I have written a post on this before – “you need a plan not a man” – but with all of the recent headlines about cheating husbands (John Edwards, Governor Sanford and Senator Ensign) and their suffering wives it bears repeating.
First of all marrying rich is never a given and rarely the solution. Second, there is no guarantee the relationship will work out. A lot of marriages end in divorce; it is a myth that you will always wind up with half of the assets. Third, having your own career means you are at no ones mercy. You answer only to yourself and are not dependent on anyone – a very empowering notion.
To paraphrase Maureen Dowd, if you give up your career to focus on your husbands/significant other/or at the request of a “special friend”, it is not his/her/their fault if things don’t work out and it turns out you sacrificed more for the relationship than they did. “Like an investor in a down market, you took a risk without a guarantee that it would pay off. If you make your significant other your career and you lose them, you lose your career too.”
http://www.nytimes.com/2009/07/01/opinion/01dowd.html?_r=1
Raising your joint children is no guarantee either. Mrs. Edwards, Mrs. Ensign and Mrs. Sanford all have children. Religion is not a savior – Governor Sanford considers himself a very religious man. Jobs can be lost – unemployment is currently 9.5%, and, in a worse case scenario your significant other could die.
The best thing you can do to take care of yourself (and your children) is to make and learn to manage your money.
Note on divorce rates:
Married adults now divorce two-and-a-half times as often as adults did 20 years ago and four times as often as they did 50 years ago… between 40% and 60% of new marriages will eventually end in divorce. The probability within… the first five years is 20%, and the probability of its ending within the first 10 years is 33%…
—Brian K. Williams, Stacy C. Sawyer, Carl M. Wahlstrom, Marriages, Families & Intimate Relationships, 2005 as quoted on Wikipedia
July 3rd, 2009
Since you have a finite amount of money with which to make decisions, every decision has consequences. Opportunity cost is what you might be giving up with each decision you make. So consider what something is really costing you – today and in the future. The good news is that opportunity cost is not really a number so, no math. Rather, it is a set of alternatives. For example, if you stay in a less-than-fulfilling relationship, you may be giving up the opportunity to meet a new, more compatible person. And, obviously, if you purchase an outfit at Juicy Couture, unless you have an unlimited shopping budget, you give up the opportunity to purchase something even cuter at Urban Outfitters. In finance, opportunity cost refers to the price you may pay in lost opportunities by choosing one alternative over another. So it behooves you to think about the opportunity cost as you weigh decisions.
As a Fashionista you think about this every day. If I skip dinner for a week or two to pay for those boots, will I be too wiped-out to enjoy wearing them? If I skip on cosmetics to support my Starbucks habit, will I drink my coffee alone? If I use my rent money to buy a whole new wardrobe, will I have a closet to put it in? Opportunity costs loom large in such decisions.
May 5th, 2009
Too good to be true? Actually yes, but we’re getting closer. Scientists have discovered a type of fat in our bodies called brown fat. I know more fat is hardly cause for celebration. But we LIKE brown fat! Turns out, brown fat burns calories. Yes, you did read that correctly, burns calories. And, even better, it’s activated by low temperatures. So turn off your thermostat, don’t buy that pea coat, and scrimp on sweaters. You’re wallet and waistline will thank you!
http://www.cnn.com/2009/HEALTH/04/10/brown.fat.obesity/
April 13th, 2009
You dream about what you’ll buy. (Maybe you can finally get that pony!) Or, what debts you’ll pay off. (“Credit Card Company, kiss my rear-end.”) The only fun thing about tax time is thinking about the refund check.
However, some of you – and I’m not pointing any fingers – are struck by “refund anticipation” disease. You sign a piece of paper and get an advance from your tax preparer on your refund check.
There is a serious side-effect from “refund anticipation” disease you may not realize: The advance loan comes with super high interest rates. Fortunately, there is a quick cure – don’t take out an advance against your tax refund. After all, why pay super high rates for borrowing your own money? Instead, simply wait for the check to arrive.
What if you need the money not for impulse shopping but because you really need it? Try as hard as you can to refrain. The high interest rates will cause you to fall further into debt – remember refund advances are short-term loans which are due and payable – high interest payments and all.
March 30th, 2009
Dorothy Parker once said: “Take care of the luxuries and the necessities will take care of themselves.” She obviously said this before this recession started (plus she died in 1967).
These days, you must take care of the necessities. One important necessity people often forget about is a cash cushion – ideally three months of living expenses. Start by saving up to one month’s worth of living expenses. This may take awhile, but it is really crucial. You want to be able to take care of yourself if you hit any bumps. Work your way up to three months and then promise yourself you won’t touch that money unless there is an emergency.
The sooner you start saving, the better. I urge you to start saving now – even if you only have a little bit left over every month. For example, if you are 21 and do not have any savings, but can start saving one hundred dollars per month (25 dollars per week), and earn five percent interest on your money, by doing nothing more, you will have saved a little over 78,000 dollars by the time you are fifty. (See my January 19, 2009 blog on Interest). If you wait until you are 31 to start saving the same 100 dollars per month, when you are 50 you will have a little less than 38,000 dollars. In this example, by waiting 10 years to start your savings meant you saved 40,000 dollars less. The higher the interest, the bigger the difference will become between saving now and saving later.
Dorothy Parker also said, “I’ve never been a millionaire but I just know I’d be darling at it.”
Fashionista Fact:
Dorothy Parker (www.en.wikipedia.org/wiki/Dorothy_Parker) was an American writer and poet who is best known for her acerbic wit, wisecracks and sharp eye. You could do a lot worse than to read her.
March 10th, 2009
What’s hot? What’s new? What’s now? What to buy? Keep? Store? It can be hard to stay in style. What’s the hottest fashion trend these days? Learning how to manage your money. Whether it’s getting out of debt, making and using a budget, or simply spending less and saving more – understanding personal finance, and the economy at large is totally in.
Fashionista Fact:
Economics is the new hot major on campus!
http://www.npr.org/templates/story/story.php?storyId=101321353
March 3rd, 2009
Finance, and therefore money, often gets a bad rap. Women who like money and want more of it are too often considered ambitious, greedy or gold diggers. However, having money can be a truly enjoyable – even life changing – experience. At its best, money is about freedom and choices, about having options and opportunities. It’s about being able to live the life you want to live in the way you want to live it. Money allows you to travel, to go to school, or to work at something that offers you full satisfaction, regardless of compensation, instead of being stuck in a job you hate just to pay the bills. Money gives you the freedom to choose whether to buy that Prada bag or the Gucci boots or, in a perfect world, both. Money allows you to be self-sufficient; with the confidence that comes with being independent and the freedom to make life choices that are right for you. It doesn’t guarantee all this, but it certainly ups the odds. It’s a means to an end we all aspire to.
So knowing how to manage your money is vital. There are a lot of decisions to make (student loans, buying a car, buying a house, how many pairs of shoes you can own without being obscene) which will rely on your having a basic understanding of your personal finances. Money can be cheap or expensive, depending on what you know about how to use it. For example, if you charge those Manolo Blahnik shoes – the ones you know perfectly well you can’t afford – to your credit card and don’t pay the bill in full when it arrives in the mail, the shoes become a lot more expensive than the original number that was on the price tag because of the interest the credit company charges.
I know many of you think finance is boring and that you are not good at math. But understanding the basic connects of money management is crucial – just look at the mess the economy is in. So please make an effort – I promise it will be worth it. (Especially when you are able to afford whatever it is you want without having to stress about when the credit bill is coming).
February 23rd, 2009
In his inaugural speech, Obama quoted the Bible: “the time has come to set aside childish things.” The question is does that include an obsession with shoes? He asked the nation to grow up and cited our “badly weakened economy” as a consequence of not just “greed and irresponsibility on the part of some but also our collective failure to make hard choices…”
So yes, sadly, it applies to shoes – or at least our obsession with them. A poll of 1,057 women by the Consumer Reports National Research Center for shopping magazine, ShopSmart, found that U.S. women on average own 19 pairs of shoes, although they only wear four pairs regularly; 15 percent have over 30 pairs.
Carrie: [In shoe store with Miranda]: Where did all my money go?
Miranda: At four hundred dollars a pop, how many of these do you own? Fifty?
Carrie: Come on…
Miranda: One hundred?
Carrie: Would that be so wrong?
Miranda: Four hundred dollars times one hundred, there’s your down payment.
Carrie: That’s only four thousand dollars.
Miranda: No, that’s forty thousand dollars!
Carrie: I spent forty thousand dollars on shoes and I have no place to live? I will literally be the old woman who lived in her shoe.
Carrie, with her disregard for her spending habits – tossing off hundreds of dollars for things she doesn’t need and will, in all likelihood, never wear – might be incredibly chic but is a very bad financial role model.
Managing your money, taking control of your finances and living within your means requires hard choices. However, if you put off or don’t make the hard choices, they become impossible.
January 22nd, 2009