"non-redeemable (but tradable) bonds "
I don't see why anyone would spend 97% and get nothing tangible in return. It amounts to a donation scheme that has a possibility of someone donating back to the original donor at a later date.
posted on 07/17/2004 9:16:41 PM PDT
No, it is not a donation scheme. If you own a bond, you can sell it to somebody else wishing top buy it. Let's say you bought a $10,000 EduBond. You collect dividends on it for 5 years, $1,500. After 5 years, you decide to sell it, not for the $10k you paid for it, but $11k. So, from your $10k investment, you made $2,500. A $2,500 return on a $10,000 investment. That's a 25% return in 5 years! pretty darned good. For an investor to lose money in a 5-year period, the price of the bond would have to fall 15%.
Do you trade stocks? If so, this will make sense. Often, companies issue new shares in addition to the ones already in circulation; Usually this is done by selling shares to an "institutional investor" that can buy a large chunk of shares. If you own a share in the company and wish to sell it, you don't go to the company and hand it in; you have to find somebody to buy it. If you can't find somebody to buy it, you have to drop your "ask" price until you find a buyer. EduBonds will work in the same way.
Actually, it would make the EduBond market more fluid if we "split" the EduBonds into smaller units, perhaps $100 apiece; that sounds better. $100 EduBond shares will be pretty easy to trade.
So you see, it IS NOT a "donation scheme". If it were a donation scheme, you would also be donating your money to the stock market every time you bought a share of a company. Any questions???
To: spunkets; drtom
Here's how attractive it would be to investors if we assume a constant 3% dividend rate and 3% appreciation in bond price every year:
Year 1: 100.00 x .03 = $3.00 dividend
Year 2: 103.00 x .03 = $3.09 dividend
Year 3: 106.09 x .03 = $3.18 dividend
Year 4: 109.27 x .03 = $3.28 dividend
Year 5: 112.55 x .03 = $3.38 dividend
Sell at 112.55
$15.93 (dividends) + 12.55 (sell profit) = $28.48 profit
$28.48 profit/$100 investment = 28% ROI!
Annualized ROI = 5.7%!
Here's how it would be if we assumed the same dividend, but the bond dropped 3% every year:
Year 1: 100.00 x .03 = $3
Year 2: 97.00 x .03 = $2.91
Year 3: 91.26 x .03 = $2.74
Year 4: 88.52 x .03 = $2.66
Year 5: 85.87 x .03 = $2.58
Sell at 85.87
$13.89 (dividends) 14.13 (sell loss) = $0.24 loss
$0.24 loss/$100 investment = -0.24% ROI
Annualized ROI = -0.048%
So you see, even with a 14% drop in price, the investor is still breaking even. That's the beauty of dividends. In the stock market, dividends behave slightly different, with dividends being a defined amount, not a defined percentage.
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