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Bond basics

In his latest video tutorial, MoneyWeek’s deputy editor Tim Bennett explains the basics of bonds – what they are and how they work.

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Bonds

A bond is a type of IOU issued by a government, local authority or company to raise money. If, for example, a company wants to borrow money for ten years at a time when investors expect a 5% yield, it must offer a £5-a-year interest for every £100 until the bond matures (this payment is known as the coupon). However, expected yields are constantly changing. If interest rates rise to 10%, a new investor won’t be willing to pay £100 for an annual return of £5 when he can get £10 elsewhere.

He will expect a minimum 10% on his initial outlay, so the price of the bond will have to fall to £50 to reflect that. So, at a time when interest rates are going up, bond investors are seeing the value of their asset drop. On the other hand, if interest rates fall, a bond’s price will rise.

• Entry from MoneyWeek’s Financial glossary.

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In this video, Ed Bowsher explains how to calculate a company’s profit margin, why it is the best way to evaluate profitability, and how you can use it when analysing a company.

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MoneyWeek Videos is our free weekly video email which breaks down the complicated world of finance and helps you understand what's really going on. Every week, MoneyWeek's Ed Bowsher takes a key piece of financial news or jargon and explains it. To join MoneyWeek Videos for free, just enter your email address.

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  • Pinkers Post

    No. It’s in terminal decline. It was revealed, today, that Aldi is now catching up with Waitrose. This is not a surprise. Aldi has moved upmarket but at the same time retaining its ‘discount’ format – very clever.

    As for Tesco, a lost cause: Suffering from a serious identity crisis, only a few days ago Tesco added ‘property developer’ to its ever expanding portfolio. Nobody knows what this company stands for or, indeed, what it IS! Supermarket? Restaurant (Giraffe!)?, coffee shop chain (Harris & Hoole)?, tech retailer (Huddle), insurance company?, bank? and so the list goes on… Clarke clearly didn’t get it: the old-style Leahy conglomerate is not the future, it’s history. Retail analysts pressing for a price war, too, don’t seem to get the message. Slashing prices and reducing profit margins is not the answer; it will only provide a short-term blip in the landscape. Radical action is needed: Break it up! And Clarke clearly was not up to the job. He was panicking, pursuing a ‘strategy’ which is well past its USE-BY (as opposed to SELL-BY) date. To top it all, Cantor recently upgraded Tesco from SELL to BUY, arguing it is now undervalued. Tesco is not undervalued. If anything, it’s overvalued. Ignore it at your peril, but a stock is cheap for a reason. And it could become cheaper still… only to turn out to be very expensive, indeed! Entry ‘Cleared OUT!’ 21 July 2014 (pls scroll down): http://pinkerspost.com/inout.php

  • fandangle

    What really worries me is when I read that 75% of Tesco branches are outside the UK but 75% of profits come from the UK. This suggests to me that Tesco have been short changing the UK consumer for a long time while at the same time making a mess of their overseas investments. Vulnerable then on two counts. I’m staying well away !

  • dibahl

    Nice video.Would it be possible for you to post some videos on how different sector like banking, insurance, oil etc. works and what an investor should look for in these companies?

    Also a video on what companies spin off?

    Thanks