by the finance major | Mar 17, 2023 | Education, Personal Finance
The bond market has been a topic of focus recently given the fallout of Silicon Valley Bank (SVB) and Signature Bank.
There’s an inverse relationship between bond prices and yields. This means that when bond prices go up, yields go down, and vice versa.
To understand this relationship, it’s helpful to know that a bond is essentially a loan that an investor makes to a company or government. When you buy a bond, you’re essentially lending money to the issuer in exchange for interest payments (known as the bond’s “yield”) and a promise to repay the loan (known as the bond’s “face value” or “par value”) at a later date.
Example
Let’s say that you buy a bond for $1,000 with a yield of 3%. This means that you will receive $30 in interest payments each year for the life of the bond (usually several years). However, let’s say that interest rates in the broader economy start to rise, and new bonds with similar risk profiles are now offering yields of 4%. This means that your 3% bond is now less attractive to potential buyers, since they can get a better return on their investment elsewhere.
As a result, the price of your bond may start to fall, since there are fewer buyers willing to pay $1,000 for a bond that is only offering a 3% yield. In order to make the bond more attractive to potential buyers, the yield on your bond may need to increase to match the yields being offered by new bonds. This means that the bond’s price will fall until its yield matches the market rate.
Conversely, if interest rates fall and new bonds with similar risk profiles are now offering yields of 2%, your 3% bond becomes more attractive to potential buyers. This means that the price of your bond may start to rise, since there are more buyers willing to pay $1,000 for a bond that is offering a higher yield than new bonds. In order to keep the bond’s yield in line with the market rate, the price of the bond will rise until its yield matches the market rate.
by the finance major | Feb 22, 2023 | Personal Finance
Deciding whether to invest or pay off debt is a common financial dilemma, and the best approach will depend on your individual circumstances. Here are a few factors to consider:
1. Interest Rates: One of the most important factors to consider is the interest rate on your debt versus the potential return on your investments. If the interest rate on your debt is higher than the return you could earn from investing, it may make sense to pay off the debt first. For example, if you have a credit card balance with a high interest rate of 20%, paying off the balance would likely provide a greater return on investment than any other investment opportunity.
2. Time Horizon: Another important factor to consider is your time horizon. If you have a long time horizon, such as several years or even decades, investing may be a better option. This is because the longer your money is invested, the more time it has to grow through the power of compounding. On the other hand, if you have a short time horizon, such as less than a year, it may be better to pay off debt first to avoid the risk of losing money on investments.
3. Risk Tolerance: Investing always comes with risk, so it’s important to consider your risk tolerance. If you are risk-averse, paying off debt may be a better option since it provides a guaranteed return on investment. If you are comfortable with taking risks, investing may be a better option since it has the potential for greater returns over the long term.
4. Emotional Factors: Finally, emotional factors can also play a role in the decision to invest or pay off debt. For example, if you have a high level of debt and it causes you stress or anxiety, paying it off may be a priority for you. On the other hand, if you have a strong desire to build wealth and see your money grow, investing may be a more attractive option.
Whether to invest or pay off debt depends on a variety of factors. It’s important to evaluate your situation and priorities to determine the best course of action.
by the finance major | Feb 19, 2023 | Education, Personal Finance
Day trading is where a person buys and sells stocks, options, or other financial instruments within the same day. The goal is to make a profit by taking advantage of small price movements in the market.
In day trading, a person will buy a financial instrument at one price and then sell it at a higher price, hopefully making a profit. They may do this multiple times throughout the day, buying and selling different financial instruments as the market changes.
Day trading can be extremely risky, as it requires a lot of skill and knowledge to make good trades consistently. It also requires a lot of time and attention, as you need to be constantly monitoring the market to make sure they are making the right trades at the right time.
Overall, day trading can be extremely risky and is not generally recommended. It’s important to do your research and understand the risks before getting involved.
If you’re looking to get some practice, consider checking out Webull. It’s a trading simulator where you can test your strategies risk-free and commission-free.
Check out this post for recommended books on general investing.
by the finance major | Feb 19, 2023 | Education, Personal Finance
A share of stock represents ownership in a single company, which means that when you buy a share of stock, you are buying a small piece of that company. If the company performs well and its profits increase, the value of the stock may go up, and you may be able to sell it for more than you paid for it. However, if the company does not perform well, the stock may decrease in value, and you may lose money if you sell it.
An ETF, or exchange-traded fund, is a type of investment that pools together money from many investors to buy a basket of different stocks, bonds, or other assets. When you invest in an ETF, you are buying a small piece of the entire pool of assets, which means that your investment is spread across many different companies. The value of your investment in the ETF goes up and down depending on how well the underlying investments in the fund are doing.
The main difference between a share of stock and an ETF is the level of diversification and risk involved. When you invest in a share of stock, you are only investing in one company, which means that your investment is concentrated in that one company. With an ETF, you are investing in many different companies, which means that your investment is diversified and spread out across multiple companies. This can help reduce the risk of losing money if one company performs poorly.
In short, a share of stock represents ownership in a single company, while an ETF represents a basket of investments spread across multiple companies, providing diversification and potentially reducing risk.
Check out this post for recommended books on general investing.
by the finance major | Feb 17, 2023 | Personal Finance
A mutual fund is a type of investment that pools money from many different people to buy stocks, bonds, and other assets. When you invest in a mutual fund, you are buying a small piece of the entire pool of assets. The value of your investment in the mutual fund goes up and down depending on how well the investments in the fund are doing.
A savings account, on the other hand, is a type of bank account where you can deposit money and earn interest on the balance. Savings accounts are usually used to save money for short-term goals like a vacation or an emergency fund. The money you deposit in a savings account is insured by the government up to a certain amount, which means that even if the bank fails, you won’t lose your money.
The main difference between a mutual fund and a savings account is the level of risk involved. When you invest in a mutual fund, you are taking a risk that the value of your investment may go down if the investments in the fund perform poorly. With a savings account, you are not taking on any investment risk, but you may also not earn as much return as you would with a mutual fund.
In short, a mutual fund is an investment vehicle that can potentially earn higher returns but comes with higher risk, while a savings account is a safe place to store money and earn a small amount of interest.
Check out this post for recommended books on investing.
