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Subject:  Re: Why should bond prices drop? Date:  1/11/2005  5:39 PM
Author:  TravisJ2002 Number:  11586 of 35400

Thank you for all of your insightful replies. I believe that if I do decide to put some money into bonds (probably bond index funds) it will be into short term bonds, at least until yields are higher in general.

I did note one thing I wanted to comment on, however:
So Microsoft should have sunk before its big dividend since it was going to go down then? Really? Or am I missing part of the principle here since dividend paying securities would be most like bonds and they do have a drop when they go ex-dividend.

The catch here is that if you sold before the dividend, you wouldn't have gotten the dividend, and if you had sold short, you would have had to pay OUT the dividend. Therefore, it becomes unprofitable to try to exploit the decrease in share price on the ex-dividend date (not to mention other variables the may change the price on that date).

On the other hand, if Microsoft is earning $1 per share per year(imaginary numbers here), and suddenly everyone in the market learns that Microsoft if going to earn $2 per share for the next year (when they previously believed it would be $1.10), then the stock price will go up now as opposed to next year (with some discounting for the chance that it wont actually be $2).

However, I've heard some interesting arguments about why this type of thinking may not apply to the bond market. But, does this mean that in a period of decreasing interest rates, one could make short term profits by buying before the rate decrease and then selling after. Or would this not work because the price wouldn't change, say, the day of the interest rate change, but over a period of time? Long term it wouldnt be a good idea because you would be decreasing the interest rate that you could get (unless you never planned to keep the money in bonds in the first place). Since, as far as I know, you can't sell short bonds, this wouldn't really apply to increasing interest rates.
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