Bonds

[sam1952]

I really don't have much of an understanding of the bond market but I was recommended a bond yesterday.

The bond was a corporate bond AA ( Alcoa ) Details were, bond matured in june 2010, cost $890 per $1,000 and interest paid semi-anually at about 6.73 %

Down side was explained as if Alco went out of business, bond owners had a better chance of receiving monies over stockholders.

What really is the downside of the bond market. Any insight, comments would be appreaciated.

[acptulsa]

The downside is that there are a lot of dollars clogging the banks waiting to be loaned out, and once they are there will be inflation. Now, I don't have a crystal ball and I don't know what the rate of inflation will be. But so long as these dollars (which have already been 'printed', for lack of a better term, by the Fed) are looming over the scene, I don't give bonds more than another month as a 'safe haven'. I really think the interest on those bonds will not keep up with the rate of inflation.

But maybe that's just me.

[sam1952]

I understand that the bond and its interest may not keep up with the rate of inflation. It certainly is a better interest rate vs CD's for the same term.

Are there other downfalls I need to be aware of? Thanks

[Johnnybags]

If you have that horizon buy DBA agriculture at 23.00 and sell the Jan 10 23.00 calls at 3.00. Food cannot go under, but could go lower. If it stays the same or goes up with inflation you have a 3/23 return or about 15 percent from now to Jan 2010. If it goes to 20 you have no return, under 20 a loss.

[sam1952]

thank you both for the responses.

Johnnybags, I understand less about what you proposed there than the bond market. I have a basic understanding of puts and calls and will spent the weekend educating myself on the idea.

[Zippyjuan]

I understand that the bond and its interest may not keep up with the rate of inflation. It certainly is a better interest rate vs CD's for the same term.

Are there other downfalls I need to be aware of? Thanks

If you hold the bond until it matures, the only risks you face are inflation (and you seem pretty safe on that between now and 2010) or default of the bond issuer. If you think you may sell it before it matures you will face interest rate risks. If interest rates go up, you will have to sell your bond for less than you paid for it to match the return a potential buyer can get from buying a new bond. If interest rates go down you could sell for a higher price.

[gaazn]

I'd rather buy common shares of MO, which pays a hefty reliable dividend. And it has better upside than Alcoa bonds.