The Finatical
Week of October 18th, 2022 - Trading Bonds, Apple's Savings Account, An Energy Crisis
Topic Breakdown - Trading Bonds
Many people know about trading stocks, but not nearly as many understand how to trade bonds. Today, we will be going over this topic!
Introduction
Before we get into how bonds are traded, you might want to know what a bond is. When they need to raise money, governments and businesses issue bonds. By purchasing a bond, you are basically lending the issuer money (giving them a loan). In exchange, they promise to repay you the face amount of the loan on a particular date and to make periodic interest payments—typically twice a year—along the way, and this is how you profit. So think of a bond as a loan that you are giving to a corporation, and you make money from the interest that they pay on that loan. This is why the bond market is sometimes called the ‘debt market.’ Also, bonds are typically safer investments than the stock market. This is because you get a predictable income from them, in the form of interest, and you get your principal (initial investment of giving the loan) back.
Types of Bonds
It is also important to keep in mind that there are different types of bonds. There are 4 main types: corporate bonds, investment-grade bonds, high-yield bonds, and municipal bonds.
Corporate bonds: bonds issued by both public and private companies.
Municipal bonds (sometimes called “munis”): bonds issued by states, cities, counties, and other governmental bodies.
The above types of bonds can be higher or lower risk for you, the one buying the bonds, based on a borrower’s credit. If it’s not good, there is a risk factor in that they might struggle to pay you back, but that’s why you get more interest. If they have better credit scores, there’s less risk, but also less profit for you (interest).
High-yield bonds: These bonds offer greater interest rates in exchange for the higher risk because they have a lower credit rating than investment-grade bonds, which implies a larger credit risk.
Investment-grade bonds: Compared to high-yield corporate bonds, these bonds have a higher credit rating, which suggests a lower credit risk, but you don’t get as much money from interest.
Trading Bonds
So how can you trade bonds? Essentially, there are 2 main markets for bonds: the primary market, and the secondary market. New stocks and bonds are first offered to the public on the primary market. After they have been bought on the primary market, they can be further traded on the secondary market, which is what we will cover in this article. On the secondary market, bonds are traded through brokers. High initial minimum deposits are typical at several specialized bond brokerages. Additionally, account maintenance costs could apply. Of course, there are also trade commissions. Broker commissions can range from 0.5% to 2% depending on the quantity and type of bonds purchased. You might be informed that there are no commission fees when buying bonds through a broker, but the price could be marked up to compensate for this. Investing in a bond fund, such as a mutual fund or exchange-traded fund (ETF), which includes only bonds in its portfolio, is another option to get exposure to bonds. These funds are practical because they are typically inexpensive and contain a wide range of diversified bonds. For the average investor, bond fund ETFs may be a better option.
Financial Trends
Apple and Goldman Sachs Introduce Interest-Bearing Savings Accounts
Apple has announced that it will allow its iPhone users to be able to put their credit card rewards from the Apple Card along with additional funds from separate bank accounts into an interest-bearing savings account. This FDIC-insured account will be administered by a high-established investment bank of Wall Street, Goldman Sachs, which is both the bank and lender supporting the Apple Card. However, Apple has declared that it will not be offering an annual yield to its users at the moment, due to interest rates rapidly increasing. Apple decided to offer this savings account to its consumers because it is looking to broaden the use of iPhones through banking paired with payment and credit features, as that sector is quickly growing.
Additionally, Goldman Sachs is also bolstering its consumer business, especially with their partnerships with Apple. Apple’s buy now and pay later product, will integrate some of Goldman’s infrastructure, but has said that it will put its own spin on its credit decision and extension of loans. Apple is looking to take a major stake into an interest-bearing account by capitalizing on rising rates, as the Federal Reserve continues to reduce the ongoing rise of inflation. Another benefit that Apple will be providing their consumers with is that they will not require the savings account to maintain a minimum balance like traditional banks and won’t charge any fees. This will allow the user to automatically deposit their Apple Card rewards, known as Daily Cash, deposited into the account for their financial success.
Need To Pump More Oil To Avert A War-Level Energy Crisis
JPMorgan Chase’s Ceo, Jamie Dimon stated that the U.S. should shift its focus on pumping more oil and gas as a means to alleviate the global energy crisis, in a situation similar to a national security risk of war-level proportions. He has proclaimed of the nation’s historic overdependence on Russia’s energy — and urges for Western allies to support the U.S. in taking a commanding role in international energy security. Dimon mentions that Western nations need to be planning for the future while potential energy security concerns. He states, “We have a longer-term problem now, which is that the world is not producing enough oil and gas to reduce coal, make the transition [to green energy], and produce security for people”.
He wants the U.S., as Europe – which was once a major importer of Russian energy, relying on the country for nearly 45% of its natural gas needs, suffered the forefront of that crisis by facing higher prices and scarce supply resulting in the number of sanctions levied against the Kremlin. Furthermore, European nations have been able to hit their targets to accumulate gas supplies for the upcoming winter months. Dimon is so concerned with this issue, that he proclaims, “I would put it in the critical category. This should be treated almost as a matter of war at this point, nothing short of that”. In fact, the CEO also presented that this a perfect opportunity for Western nations to get their act together and defend their values in the crisis of autocratic regimes.
Financial Guidance
“Rich people believe ‘I create my life.’ Poor people believe ‘Life happens to me.’” — T. Harv Eker, Secrets of the Millionaire Mind: Mastering the Inner Game of Wealth
While many things that happen in life are out of your control, having the mindset that there is nothing you can do is possibly one of the worst things. What successful people have is the attitude that while not everything, they can control many things in life, and get out there.
Term of the Week
Savings accounts: Savings accounts are a type of deposit account where you can deposit money at a bank. They differ from other accounts such as checking accounts in the number of times you can access it, and the interest involved. As such, savings accounts are better for putting in money that you are not planning to spend for a while.