By J.D. Hamon
Famous technical analyst J.D. Hamon finds validated ideas and strong new options which turn out you could win great in commodities.
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The typical source of revenue investor does not wish or have to get slowed down in technical discussions of rates of interest and time. So All approximately Bonds and Bond Mutual cash supplies them what they wanta basic but complete therapy of bonds and bond cash. besides up to date bond info, this revised version additionally comprises new fabric on: * Bond mutual money * Tax-free municipal bonds * foreign bonds and bond cash
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Extra info for Advanced Commodity Trading Techniques
Suppose the investor expects the bond to be at par next year—that is, that its yield will increase to 6%. The expected proceeds are $6 from the coupon plus the $100 price. 9% yield. Why? Because the bond’s yield to maturity rose between the purchase date and the end of the investor’s holding period. 9%. Why? Because the bond’s yield declined relative to its initial rate before the investor’s horizon was reached. 9% at the end of the year, exactly the same as on the investment date. 3473. Why is it lower than the initial price despite unchanged yield to maturity?
Why? Because the 6% coupon was no longer attractive in an environment of 7% interest. 90 because for ﬁve years the investor would be receiving 6% instead of 7%. Well, the ten-year option is even more unattractive when market yields are at 7%, because for the next ten years it will be paying a below-market coupon of 6%. How unattractive? 98. Longer maturity bonds experience greater price reactions to market interest-rate changes. This is because their ﬁxed coupons will remain different from market rates for a longer period of time.
Here, on the other hand, the investor is compensated—with a yearly coupon. And since the coupon equals the yield, the compensation is perfectly adequate. Adequate enough to keep the price at par regardless of how far into the future the bond matures. What about at a 7% yield? Go back to the ﬁve-year bond for a moment. As we learned earlier, when the yield in the market rose to 7% its price had to decline in order to make it competitive with new ﬁveyear bonds paying a 7% coupon. Why? Because the 6% coupon was no longer attractive in an environment of 7% interest.