Retirement Planning And Investment For Seniors.
By Rick Law Elder Law Attorney and Senior Estate Planner In Chicago, IL Investment number 2: Bonds and other fixed income debts. One of our favorite legal clients, Fern, called in a panic one day and breathlessly cried, “I’ve been defrauded! I bought some high return bonds and this month’s statement shows that I’ve lost a lot of money!” As we spoke with Fern it became obvious that she didn’t understand what a bond is, nor how a bond’s principal value can fluctuate wildly. In the investment world, a bond is a security that represents a contract between a borrower (corporation, governmental body, banking institution) and a lender—you. A bond is usually a fixed interest loan. A bond loan arrangement uses terms that are unfamiliar to most. If you buy a bond, you are lending money to the borrower, who is the issuer of the bond. The bond loan terms detail what interest will be paid to the lender. The interest is called the coupon, and since the lender gets to hold the bond, they are called the holder. The basic relationship between a borrower and lender is well known to all. What makes a publicly traded bond so different is that the basic fundamental principal value of the bond fluctuates. Bond principal value fluctuations are caused by:
- The fixed-interest rate (coupon rate) of the bond compared to the ever-changing general market interest rates
- The perception of a change in the quality or reliability of the bond issuer/borrower
- The remaining term of interest payments
- The ability to easily buy and/or sell the bond (liquidity)