How to Make Money Selling Cash Bonds
When a government or government agency needs funds for a project or to cover a budget shortfall, a common solution involves issuing bonds. Bonds are debt securities sold to investors to defer a current cost to a date in the future. Once bonds have been issued, investors are free to buy and sell the bond certificates among themselves. On the market, prices are determined by investor confidence in the debtor's ability to pay back the bonds. The original sale price is the par value. Low confidence bonds sell at discount value, and high confidence bonds sell at a premium.
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Instructions
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Look for an opportunity to buy. The same principle of "buy low, sell high" applies to bonds as it does to stocks. But unlike stocks, the trading price of bonds isn't determined by fluctuating profits quarter-to-quarter; it's determined by the market perception of a bond issuer's (typically governments and government organizations) ability to pay back investors. Research the issuers of discount-priced bonds. Look for signs that they're strengthening their financial standing, such as through a realistic debt restructuring plan, the establishment of a new tax or other revenue stream, or the elimination of extraneous spending.
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Determine the current discount value of the bond, as well as the par value of the bond, which is the price of the bond when it was issued and a conservative estimate for your expected price growth. Inquire with your broker about his fee, which is usually a percentage of the transaction. Add the fee to your purchase price and subtract it from the par value estimated sale price. Subtract the fee-adjusted purchase price from the adjusted sale price. The difference will provide an estimated profit yield, as long as that difference is above zero. Decide whether the profit yield is desirable to you before proceeding with a purchase.
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Purchase the bonds. As you hold the bonds, keep your eye on both the price listing for the bond and news regarding the bond debtor. The listing will inform you of current increases and drops in the bond price, and the news will give you a rough idea of whether you can expect the price to continue to rise, fall or remain stable.
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Contact your broker and arrange for him to sell the bonds if and when the price of the bond has increased to your liking.
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Tips & Warnings
Ideally, the price of the bond will rise above the par value to a premium value, but remember that holding a bond in anticipation of a premium is risky. If you continue to hold bonds as you wait for a higher price, you could wake up one day and find the price has slid suddenly and steeply, rendering your investment worthless. Early on, set a price at which you'll cease to purchase a bond and a price at which you'll sell. You might not make the highest possible profit on your investment, but you'll protect yourself from your own hubris.
Bonds may be priced low for a good reason: They're junk and not a worthwhile investment. If no apparent signs exist that a bond debtor's stewards are taking steps to improve their finances, take a pass.
Be aware of whether the bond has a call date. A call date is the time at which a debtor has the privilege of recalling all issued bonds so long as they have enough money or new bonds to buy them back at their par value. Bond holders can't opt out of the call date.
References
- Investing in Bonds: What You Should Know
- "The Ascent of Money;" Niall Ferguson; 2008
- Photo Credit Thinkstock/Comstock/Getty Images
