UnThreaded | Threaded | Whole Thread (9) | Ignore Thread Prev | Next
Author: TravisJ2002 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 35357  
Subject: Re: Why should bond prices drop? Date: 1/11/2005 5:39 PM
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Recommendations: 0
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.
Post New | Post Reply | Reply Later | Create Poll . Report this Post | Recommend it!
Print the post  
UnThreaded | Threaded | Whole Thread (9) | Ignore Thread Prev | Next

Announcements

Post of the Day:
Macro Economics

2.1: The Labor Pool Problem
What was Your Dumbest Investment?
Share it with us -- and learn from others' stories of flubs.
When Life Gives You Lemons
We all have had hardships and made poor decisions. The important thing is how we respond and grow. Read the story of a Fool who started from nothing, and looks to gain everything.
Community Home
Speak Your Mind, Start Your Blog, Rate Your Stocks

Community Team Fools - who are those TMF's?
Contact Us
Contact Customer Service and other Fool departments here.
Work for Fools?
Winner of the Washingtonian great places to work, and "#1 Media Company to Work For" (BusinessInsider 2011)! Have access to all of TMF's online and email products for FREE, and be paid for your contributions to TMF! Click the link and start your Fool career.
Advertisement