Page 124 - DMGT515_PERSONAL_FINANCIAL_PLANNING

Unit 7: Investment Strategies-II

Notes
Example: you might invest equal amounts in bonds maturing in 2, 4, 6, 8 and ten years.
In two years, when the first bonds mature, you would reinvest the money in a 10-year maturity,
maintaining the ladder.
c. Barbells: Barbells are a bond investment strategy similar to laddering, except that purchases
are concentrated in the short-term and long-term maturities. This allows the investor to
capture high yields from longer maturities in one portion of their portfolio, while using
the lower maturities to minimize risk.
d. Bond Swap: Bond swapping is the sale of a block of bond swaps and the purchase of another
block of similar market value. Swaps may be made to achieve many goals, including
establishing a tax loss, upgrading credit quality, extending or shortening maturity, etc.
The most common swap is done to achieve tax savings by converting a paper loss into an
actual loss that could partially or fully offset other capital gains or income. We strongly
recommend that you speak with your financial advisor to learn more about this investment
strategy.

Selecting the Right Investment Vehicle

It has been already mentioned that there are many ways to invest your money. Of course, to
decide which investment vehicles are suitable, an investor needs to know their characteristics
and why they may be suitable for a particular investing objective.

Self Assessment

Fill in the blanks:

1. ……………..is the allocation of assets to several categories in order to spread, and therefore
possibly mitigate, risk.
2. Another diversification strategy is to purchase securities of various maturities in a
technique called………………... .
3. ……………..are a bond investment strategy similar to laddering, except that purchases are
concentrated in the short-term and long-term maturities.
4. ……………….is the sale of a block of bond swaps and the purchase of another block of
similar market value.

5. The strategy of value investing, a classic investment strategy propagated by …………. .

7.4 Investment in Bonds

Grouped under the general category called fixed-income securities, the term bond is commonly
used to refer to any securities that are founded on debt. When you purchase a bond, you are
lending out your money to a company or government. In return, they agree to give you interest
on your money and eventually pay you back the amount you lent out.

The main attraction of bonds is their relative safety. If you are buying bonds from a stable
government, your investment is virtually guaranteed, or risk-free. The safety and stability,
however, come at a cost. Because there is little risk, there is little potential return. As a result, the
rate of return on bonds is generally lower than other securities.

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