Computerized Investing is a column in the AAII Journal that covers articles about how individual investors can use digital technology to become more effective managers of their assets.
Snapshot of a Stock: The Balance Sheet
Successful investing has no secret formula. Since financial statements are basic tools of fundamental analysis, it is important to be able to read and analyze them.
Bond prices go up and down in response to two factors: changes in interest rates and changes in credit quality. Individual investors who purchase bonds tend to worry a lot about the safety of their money. Generally, however, they tie safety to credit considerations. Many individual investors do not fully understand how changes in interest rates affect price. Since the late 1970s, changes in the interest rate environment have become the greatest single determinant of bond return. Managing interest rate risk has become the most critical variable in the management of bond portfolios. In this article, we'll see why.
"Interest rate risk," also known as "market risk," refers to the propensity bonds have of fluctuating in price as a result...
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I Savings Bonds are government bonds that pay both a fixed interest rate and an adjustable interest rate that corresponds with the U.S. Consumer Price Index (CPI).
The fixed rate of return is determined when the bond is purchased. The variable rate is calculated semiannually based on the inflation rate.
The variable rate on an I Savings Bond is determined using the Consumer Price Index for Urban Consumers (CPI-U) for the months of May and November of each year. Fixed rates and semiannual inflation rates are combined to determine composite earnings rates. An I Bond’s composite earnings rate changes every six months after its issue date.
Fixed and variable rates for I Savings Bonds issued over the last 10 years are posted on the Treasury Direct Web site (www.treasurydirect.gov).
What if the value of the CPI is falling?
This happened in the most recent pricing of these bonds. In May of 2009, the fixed rate for newly issued bonds was 0.10% and the semi-annual inflation rate was –2.78%. The formula for determining the interest rate is as follows:
Composite rate = [fixed rate + (2 × semiannual inflation rate) + (fixed rate × semiannual inflation rate)].
This equation led to a composite rate of –5.74%. The Treasury will not allow composite rates to be negative, so the interest rate was set at 0%.
I Savings Bonds have 30-year maturities; however, you can redeem them at any time after a 12-month minimum holding period from the date of purchase. These bonds increase in value monthly and all of the interest is paid when you redeem the bond. If you redeem a bond before it is five years old, you will forfeit the most recent three...
