A bond is a loan or a debt between bond issuer (borrower) and bond holder/owner (lender). Like a loan or debt, a bond must be paid back with interest or at some rate of return. A bond holder, obviously, has no ownership interest in bond issuer - unlike a stock holder/owner.

There many types of bonds. Here are the more typical ones:

1. Treasury securities - Treasury Bills - mature one year or less; Treasury Notes - mature one to ten years; Treasury Bonds - mature 20 to 30 years; and Treasury Inflation Protected Securities (TIPS).
2. Federal government agency bonds - such as Small Business Administration, the Federal Housing Administration and the Government National Mortgage Association (Ginnie Mae) - there bonds are typically backed by the ‘full faith and credit’ of U.S. government.
3. Government Sponsored Entities bonds - such as the Federal Home Loan Mortgage Association (Freddie Mac), the Federal Home Loan Mortgage Association (Fannie Mae) and the Federal Home Loan Banks provide credit for the housing sector and Federal Agricultural Mortgage Corporation (Farmer Mac).
4. State and municipal bonds - these can be in form of “revenue bonds” or “general obligation bonds”
5. Corporate bonds - issued by corporations such as General Electric.

A bond is at face value (or par value) - usually $1,000 or $5,000. The bond issuer promises to pay bond holder the face value or principal at some specified future date known as the maturity date. To compensate the bond holder for paying principal at maturity date, issuer agrees to pay interest to bond holder at some coupon rate.

For example, let’s say you buy four - 10 year bonds at face value of $1,000 and pay 6% coupon rate. As a bond holder, you would receive $240 per year for 10 years and then receive $4,000 on the maturity date. Now, this example assumes a fixed coupon rate but many bonds have a floating rate - a coupon rate tied to some index rate such as London Interbank Offer Rate (LIBOR).

Now, the above example as assumes you buy bond in primary market or initial offering. But most bond investors buy bonds in the secondary market or bond market. This is where bond prices become relevant because bond prices do fluctuate over time. Bond pricing can be tricky for someone new to bonds. Let’s start with pricing convention - bond are priced as a percentage of par value. For example, you might see a quote in Bloomberg for 101-19 (dash or colon represents 32nds of a dollar for 10 year Treasury Note, this means the bond price is 101-19/32% of $1,000 or $1,015.94. In this example the bond price was above par value (101-19) this is known as a premium. Bonds trading below par value (say 99-27) are trading at a discount.

There are a number of factors that effect the price of bonds including issuer’s credit rating, inflation expectations, supply/demand of debt issues, and economic outlook. These factors and a few others such as reinvestment risk are reflected in market yield or bond yield. Generally, bond investors demand higher market yield or bond yield to compensate for higher risk. And this is where it sometimes gets tricky but it’s very important to understand: Bond price and market/bond yield have an inverse relationship - when market/bond yield goes up, bond price decreases; and when market/bond yield goes down, bond price increases.

So much for an introduction. Any questions?

Like all investments, before investing make sure we understand what we are getting ourselves into. For information on investing in bonds - check out - InvestinginBonds.com. Good luck.

Hobson offered the following very important tip:

DO NOT CARRY YOUR SOCIAL SECURITY CARD IN YOUR WALLET

If your wallet is ever lost or stolen someone with bad intentions has your entire identity at their disposal - name, home address and social security number. They can do a lot of damage with that information. It was only a few years ago when I started not carrying my SS card in my wallet. It is something that we often overlook but with identity theft a huge ‘black market’ industry we can no longer afford to.

Good luck.

This was a very tough question because obviously there are a lot of very important things to understand when it comes to investing.

1) Understanding the concept and relationship of risk and return. Riskier assets such as stocks and most real estate require a higher return or yield to compensate for the risk taken. Also, watch out if some snake oil salesman says he can get you a risk-free high return - just not true. High risk - high return and low risk - low return.

2) Understand the investments. This means a thorough understanding. It doesn’t matter if its a mutual fund, an exchange traded fund (ETF) or stock. And it doesn’t matter that a financial advisor has recommended something. Know where and what your hard earned money is going into because it may not be what you like or are comfortable with (despite potential for high return).

I can’t pass up the opportunity to add two more pieces of investment advice - that’s just how I roll:

3) Consistency is important. This means making investing a habit or routine - whether on a monthly basis or quarterly basis.

4) Understand your risk tolerance. No one can tell you what your risk tolerance is. This is a very subjective thing. Once you understand your risk tolerance don’t stray away from it no matter how attractive an investment may be.

How about you? What other investment advice do you have?

By: Bryce Covert

This week’s credit check: Consumers overall pay up to $48 billion more a year because of swipe fees. Low-income households end up paying $23 because of them while high-income households receive $756 every year.

Whenever I bring up the predatory bank practices that keep people stuck in debt, usually the first push back I get is that credit cards can be useful. Cards with rewards are a way to get things in return for spending money; if you open an account with cash back or rewards programs, some people point out, and you pay down your balance every month, you’re basically getting something for nothing from your card company (unless of course the account has an annual fee). On the surface this is true, but dig a little deeper and it’s not quite that simple. Strictly speaking, the money to finance these goodies comes from merchants big and small who are charged outsized fees every time a card is swiped, fees they have literally no power to negotiate over or change whatsoever. But the reality is that the costs get passed on further to consumers — all consumers, in a very regressive way.

Zach Carter and Ryan Grim have written a fantastic, long-read article on the battle over swipe fees raging on Capitol Hill. Because this is a little-covered fight, here are the basics: as part of the Dodd-Frank financial reform bill, a cap was to be put on how much a bank can charge a merchant each time it swipes a customer’s debit card. (Banks successfully lobbied to keep credit cards out of the picture altogether, so those fees will continue either way.) That charge is called an interchange or swipe fee. Banks used to charge merchants about 44 cents per transaction, but under the new rules that would be capped at 12, costing the big banks about $14 billion in fees per year. (As RJ Eskow points out, compare that profit loss to the $20 billion in bonuses banks gave themselves last year.) But since the date for implementation of this rule has neared (it was supposed to be finalized on April 21 and in effect by July 21), it has been pushed back and is now under heavy attack from — you guessed it — Wall Street lobbyists.

One major takeaway from Carter and Grim’s article is that the current fight is in many ways between big corporate interests and other big corporate interests — i.e. the Wal-Marts and Targets vs. the Bank of Americas and Citigroups. But beyond that fight, there’s another battle that we think very little about: these fees pit rich against poor.

Steve Pearlstein explained how we got to a point that card companies can fleece merchants and consumers: “Visa, Mastercard and American Express now account for more than 90 percent of the market. And with that much concentration comes the power to charge higher prices than would be possible in a market with many competitors.” Our interchange fees in the US are higher than in any other industrialized country. And those higher prices are passed on to consumers through higher prices on the products that the overcharged merchants sell. These price hikes amount to up to $48 billion more a year that we pay on gas, groceries, entertainment, you name it. The banks claim that they need to charge fees to balance out the risk of lending through credit cards, but since we’re only focused on debit cards in this debate — which don’t lend to customers, but merely let them access the money sitting in their own bank accounts — that point would appear moot. Not to mention that a debit transaction only costs a few pennies. One of the banks’ claims is that this cap will kill small banks and credit unions — which ignores the fact that Dodd-Frank exempted those with less than $10 billion in assets. Not to mention that of the $16 billion in fees, half of that — $8 billion — ends up at just 10 banks.

But when these costs get passed on in the form of higher prices for the things we want and need, it turns out that the poor pay up while the rich make off with rewards. Carter and Grim’s article points to a February 2010 paper that found that 56% of fees are passed on to consumers, “raising costs for the average household by about $230 a year.” That amounts to “two weeks worth of groceries or the monthly heating bill” for a family living below the poverty line. But it gets worse for low-income families. From their article: “[W]hile swipe fees cause higher prices for everyone, affluent consumers get some of that money back in the form of rewards. The result is an effective transfer of wealth from poor shoppers to wealthier consumers.” In fact, the Boston Fed has found that, “On average, each cash-using household pays $151 to card-using households and each card-using household receives $1,482 from cash users every year.” Some cash holders might be those who refuse to use plastic, but a lot of those are likely to fall into the category of the unbanked. The study further found:

Because credit card spending and rewards are positively correlated with household income, the payment instrument transfer also induces a regressive transfer from low-income to high-income households in general. On average, and after accounting for rewards paid to households by banks, the lowest-income household ($20,000 or less annually) pays $23 and the highest-income household ($150,000 or more annually) receives $756 every year.

As Carter and Grim point out, this fee cap isn’t likely to stop banks from issuing debit cards, and there doesn’t seem to be any good reason for them to start charging fees left and right to make up for the profit loss. As they quote Senator Dick Durbin, sponsor of the amendment that sought to cap the fees in the first place, as saying, “There is no need for you to threaten your customers with higher fees when you and your bank are already making money hand over fist. And there is no need to make such threats in response to reform that simply tries to spare consumers.” It’s even less defensible when the fees are so clearly a wealth transfer from the poorest to the richest.

Bryce Covert is Assistant Editor at New Deal 2.0.

The link: How to Build a Better Budget

Please read the whole article. It has some good forms at the end. The key points:

• The first rule of budgeting: Don’t worry about perfection.
• The second rule of budgeting: The big stuff makes more difference than the small stuff.
• The third rule of budgeting: Make plans based on your real life, not how you wish life would be.
• The fourth rule of budgeting: Keep it simple.
• Get out Debt First - think “hot potato”.

It is extremely difficult to get anywhere without a plan. A budget is a form of a very important plan. It’s one of those ‘necessary evils’ if we want to improve our economic security. Budgeting is not difficult - it just takes some time and discipline - not impossible.

Good luck.

Center of Public Integrity’s released a very informative report called Buyer beware. Here are a few excerpts from the report (I strongly encourage people to read the entire report):

The politically powerful industry has also mastered a few high-pressure tactics of its own. Chief among them is the “yo-yo,” where dealers let buyers drive a new car home in hopes of locking them into a deal and later tell them their financing fell through. The tactic can lure buyers to accept a higher interest rate.

And while the financial crisis rendered subprime mortgages extinct, Wall Street is once again buying up bundled subprime auto loans, fueling a market aimed at the most vulnerable consumers and relieving dealers of the risks of making bad loans.

While the consumer thinks the negotiations are over at that point, dealers know that a lot more profit can be made off the financing.

For starters, dealers routinely jack up the interest rate on a loan and split the profit with the lender. So if you qualify for a 4 percent loan, the dealer will say the best he can do is 7 percent. Half of the extra profit goes to the dealer as a “markup.”

Buyers never know they’ve been charged more because the markup usually isn’t disclosed. The Center for Responsible Lending calls these “kickbacks” and calculates that they cost car buyers $20 billion a year.

It should be no surprise that new Consumer Financial Protection Bureau is powerless against these predators. The auto dealers/lenders secured an exemptions from the new consumer protection law. Money speaks volumes in Washington.

Here are the key finding of the Center for Public Integrity’s report.

The best defense is the best offense against predatory lenders. We have to arm ourselves with information and an understanding of what the predatory practices are so that when we experience them we know to just walk away. The Center for Responsible Lending has a wealth of information about auto loans and the predatory practices. Please check them out before making that next auto purchase.

Another thing: if you don’t know or not sure about something - ask someone before you sign on the line (other than the dealer) - a neighbor, friend or us. We can no longer expect or afford to wait for our government to protect us from predators. We are in this together.

Good luck.

Nice system we have. Too Big to Fail (TBTF) banks crash the economy, receive $13 trillion bailout, recovery nicely then stick it to their customers (again):

J.P. Morgan Chase (JPM), which has has 27 million checking accounts, has announced it will impose fees ranging from $10 to $12 per month on those accounts—though the fees can be avoided if you maintain a minimum daily balance of $1,500 or set up a direct deposit of $500 or more each month into your account….

Meanwhile, Bank of America (BAC), which has 57 million consumer and small business customers, has started a pilot program to charge new customers in Arizona, Georgia and Massachusetts for checking accounts, says spokeswoman Anne Pace. The four account options on offer have fees ranging from $6 to $25 a month, but customers maintaining a minimum daily balance of $5,000 won’t have to pay the fees.

TBTF banks require tens of billions of dollars in revenue to feed their ginormous size and pad the pockets of TBTF CEOs and executives. A slight reduction in revenue could mean that CEOs and other executive get a slightly lower bonus. Of course, TBTF Banks are saying that new (very weak) financial regulations are the culprit. But these regulations haven’t been implemented yet. These new high fees are in anticipation of new regulations. READ: just another excuse to raise fees and increase revenues. We should’ve ended TBTF banks when we had the chance.

We don’t have to accept these higher fees. It’s not that difficult to move our money to a community bank or credit union. Here are some resources to help with moving our money:

1) Keep Your Balance: A Shopper’s Guide to Better Banking;

2) Move Your Money Project - 7 Simple Steps to Move Your Checking Account;

3) Credit Union Locator

It’s time we send a message to TBTF banks that they may own both political parties but they don’t own us. Let’s let our business do the talking. It’s time to move our money!

Good luck.

I hope I am absolutely wrong.  Check out these two articles:

1) Retiring Boomers Find 401(k) Plans Fall Short

From the article:

The median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed in that account to maintain its standard of living in retirement, according to data compiled by the Federal Reserve and analyzed by the Center for Retirement Research at Boston College for The Wall Street Journal. Even counting Social Security and any pensions or other savings, most 401(k) participants appear to have insufficient savings. Data from other sources also show big gaps between savings and what people need, and the financial crisis has made things worse.

401K’s were a huge scam perpetrated on working people. They were a huge give away to Wall Street in the form of huge fees, commissions and trading schemes. Workers were told that they were now ‘in control’ of their retirement savings. Yeah right. Many people never understood investing and but were expected to pick investment on their own or rely on an “expert” who was typically paid on commission.

2) Fidelity Says Average 401(K) Account Balance Reached 10-Year High in 2010

Sounds great and any retirement savings is good but wait for it. Wait for it. The average 401(K) account balance reached $71,500. That’s good news!?! Come on, that’s not even close to what is needed to retire without experiencing a huge drop in living standard.

What can we do?

Individuals:  First, determine how much it will cost to retire. Here is a Retirement Nestegg Calculator. Second, we can continue to save as much as possible on a tax-deferred basis. Third, be careful with investments - remember it’s called a Nest Egg for a reason.

Policy:  First, strengthen Social Security - possibly lowering retirement age and increasing benefits (Social Security is NOT broken). Second, we may need some type of investment account that guarantees a certain level of income similar to a Guaranteed Investment Contract for individuals.

It’s clear we need to do something. Good luck.

Credit cards provide us with instant gratification.  The ability to get something we want right now without having to wait and save for it.  I am just as guilty as anyone else when it comes to instant gratification.  But getting over instant gratification is just one way to start rethinking how we perceive credit card debt. 

We often rationalize or more like fool ourselves into thinking that we can pay-off credit card balance in the next billing cycle but it seems it never happens.  In the U.S. the average household credit card balance is $14,750. We are not doing a good job of paying off those balances and we are paying a heavy price for instant gratification.

Consider that $14,750 credit card balance and this story from earlier in the week: My credit card had a 79.9% APR.  That’s not a typo. First Premier Bank is offering people with bad credit a credit card at 79.9% rate. The crazy thing according to the story is that people are signing up for that card. Of course there are various fees attached this card:

First Premier charges a total of $135 per year in fees. It starts with a $45 processing fee to open the account. Then there’s an annual fee of $30 for the first year—$45 for every subsequent year. Plus, there’s a monthly servicing fee of $6.25 (or $75 a year).

Cash advances will cost you $5 or 3%, whichever is greater; late payments ring up at $35. The bank will also charge you $35 if a payment on your account is returned due to insufficient funds or any other reason.

Remember credit card debt is EVIL. 

Let’s calculate the finance charges on a credit card at 79% APR using the average household credit card balance of $14,750.  The typical formula for finance charges is:

Average Daily Balance x Annual Percentage Rate (APR)  x Number of Days in Billing Cycle ÷  365

$14,750 x 79.9% x 28 (Feb.) / 365 = $904 

Wow! That’s $904 in finance charges in ONE MONTH alone. The minimum monthly payment is usually slightly higher. 

EVIL. EVIL. EVIL.

Ok, a person with bad credit and a 79.9% APR credit card probably doesn’t have that much credit on one credit card.  So let’s assume $1,000.

$1,000 x 79.9% x 28 / 365 = $61.29

Again, this is $61.29 in finance charges in one month alone!  Melodramatic? So let’s use the average APR for credit cards which is 14.25%.

$14,750 x 14.25% x 28 / 365 = $161.23

That’s even high especially considering minimum monthly payment is higher and what about other monthly expenses such as mortgage/rent, food, gas, etc.

Credit cards are the snake in that Garden of Eden story.  They satisfy our desire for instant gratification but at a heavy price later.  This is something we definitely want to change for our own salvation from financial and possibly mental devastation.

Good luck. 

Refinancing for some people may seem like the right option especially since mortgage rates are still relatively low - 4.99% for 30 year fixed (2/8/2011 - Bankrate.com). And with overall interest rate environment trending higher because of the perception of an economic recovery this may be the right time to make that move.  There are several things to consider before signing the refinance mortgage papers:

1. Research your home price - look online at sites like Realtor.com, ask local realtors about housing prices.  The point is that many areas of the country are still experiencing ‘negative equity’ which means that home values are far less than what is still owed on mortgage.  This could shut out a lot people.
2. Decide how long who plan on staying in current home. If it’s not a long-term commitment then it may not be worth refinancing especially considering potential fees/points attached to refinancing.
3. Perform a calculation to determine monthly and overall savings from a potential refinancing.  Bankrate.com has a good refinancing calculator and here is another from dinkytown.
4. Shop around and compare.  Don’t settle for the first bank you come across.  If you’re a member of a credit union consider them - if you’re not a member of a credit union then consider joining one.  Credit unions may offer lower cost refinancing mortgages than big banks.
5. Before you sign anything make sure you understand all disclosures, loan terms and the loan documents themselves. If you don’t understand something please ask someone or find the answer some way some how before signing on the line.

Good luck.

I certainly will not discourage people from creating a monthly budget.  It’s incredibly important and can be extremely beneficial particularly if we align our budget with financial goals.  The important thing to remember is that it’s not enough to just draft that monthly budget and store it where it will never be seen again.  There’s a second part of a monthly budget - budget management - periodically (monthly is best) reviewing how we are doing with the budget and making adjustments if necessary.

There are two other very important items that should be included and are often overlooked:

1)  Regular checkbook balancing or reconciliation - that’s right as soon as we receive that checking statement.  This should be habit forming.  Balancing checkbook/reconciliation is absolutely important to understanding where our money is going and can help with the budget management process.

2)  Put savings on auto pilot.  This means better utilization of direct deposits of payroll checks or direct withdrawals into some form of savings accounts.  Technology and most employers allow for direct deposits and direct withdrawals. 

These three things, which are not very difficult to do, can go a long way to getting our financial house in order starting in 2011.

Good luck. 

Higher risk means higher returns.  It’s common sense - if an investor is assuming high risk they want to be compensated for accepting that higher risk with high returns.  This is tradeoff provides one important way to compare investments. 

Consider returns on Certificates of Deposit (CDs) vs. Stock market.  CDs are relatively very low risk so their current returns (1 yr) are 1.03% compared to S&P 500 (stock market) which year to date return is 14.96%.  Sure that stock market return is high and very attractive but it’s also much much more risky than CDs. 

Just remember the next time someone is trying to sell you an investment product that they claim has ‘high returns with low risk’ - WATCH OUT.  Actually a better idea is to ignore them and move along. 

Good luck. 

Many people and gold promoters believe gold is a good hedge against inflation.  It’s not.  Gold prices fluctuate with level of speculation in the market.  Yes, that’s right price of gold is very much dependent on psychology of the investors.  Right now, gold is on an incredible bull run which may be driven by speculation by hedge fund investors and a marketing scheme by gold miners. 

But some gold bugs/promoters will say but gold is a good hedge for short-term inflation.  Warning: the measure of a good hedge is its consistent performance over time and not just some brief period in time.  Another warning: when some has to give a qualifier such as something performs well in “short-term” situations - hang onto your wallet. 

There are better hedges against inflation than gold.  Such as TIPs - Treasury Inflation Protected Securities.  The principal of a TIPS increases with inflation and decreases with deflation, as measured by the Consumer Price Index (CPI). When a TIPS matures, you are paid the adjusted principal or original principal, whichever is greater.  For more information on TIPS and how to purchase them go to - Treasurydirect.gov

Gold can serve a useful purpose in any investment portfolio.  Investing in gold, like other commodities, can provide much needed portfolio diversification.  But like most assets and commodities gold is subject to the whims and behavior of the market which we should know by now is not always rational. 

Good luck.

1)  Don’t use that plastic.  It may be too late for this option but if not - use cash or debit card.  Another option, but be careful of hidden fees, are pre-paid debit cards.

2)  Ok couldn’t avoid using that plastic then Pay the Highest APR first.

3)  Pay more than minimum balance.  New credit card disclosure rules should tell you how long it would take to pay-off balance if you just pay minimum payment. It’s quite an eye opener.

4)  Pay on time.  Don’t assume anything.  Late penalty fees can be high and any promotional rates can be forfeited. 

5)  Watch credit card statements.  Sometimes a late payment can trigger a much higher APR.  If that happens move balance to lower APR card or pay-off balance as quickly as possible.

Whatever you do - please avoid getting on the credit card debt cycle of hell.  It’s never too late to start budgeting and planning for big purchases (try to avoid using credit cards for meals and other non-emergency purchases).  But if someone is on that cycle of hell - don’t despair - take control.  It will require sacrifice to break that cycle and possible cutting up those credit cards.  Debt is an evil hot potato.

Good luck. 

Center for Responsible Lending has assembled a simple and straight forward guide to shopping for bank services.  They provide what questions to ask regarding checking services, credit cards and a few other services.  The important thing is to shop and compare.

KEEP YOUR BALANCE: A Shopper’s Guide to Better Banking

Next guide or resource is from Move Your Money Campaign. Actually, they provide several very good resources for taking back our money.  First is a search tool to find credit unions or small banks.  Next is a 7 Step Checklist for actually moving your money.  The site also has some other good resources for moving other accounts such as IRAs and mutual funds.

These two organization have made the process of taking back our money from financial conglomerates easier.  Taking back our money or moving our money is a great way of holding these financial conglomerates accountable for their sometimes fraudulent and irresponsible behavior.  Remember - please shop and compare before taking back our money.

Good luck.