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| Three articles this page: Understanding How Bonds Work How Much Life Insurance Do You Need? Are Your Mutual Fund’s Expenses Going the Wrong Direction? Understanding How Bonds Work Bonds can satisfy a variety of investments needs, for instance, providing additional income and diversi-fication in your portfolio. But do you know what you are buying when you purchase a bond or a bond mutual fund? Governments and corporations must raise money to expand or to finance particular projects. These organizations sell bonds as a method of borrowing money. When you invest in a bond, you are lending money to its issuer. The bond is issued for a fixed period of time (maturity date) that can range from 13 weeks to 30 years. The issuer will make fixed-interest payments to you over the life of the bond, and will pay you the face value of the bond when it matures. There are several types of bonds on the market. The most common are as follows: -- U.S. Treasury bonds-The federal government sells bonds to finance its debt. They are backed by the “full faith and credit” of the U.S. government and are therefore regarded as the most conservative investments available. Interest received is tax-free at the state level, but is subject to federal income tax. -- Municipal bonds-State and local governments might use the funds for the construction of schools, roads, and land conservation. The interest from municipal bonds is usually exempt from federal and state income tax. This tax-free status should be taken into consideration when comparing municipals to taxable investments. -- GSE-Government-sponsored enterprise securities are sold by government agencies like Fannie Mae, Freddie Mac, and Ginnie Mae. This money is used to fund loans for special borrowers such as farmers, homebuyers, and students. -- Corporate bonds-Companies often need money to build or improve facilities, pay off old debt, to acquire other firms, or for other expansion purposes. Interest from corporate bonds is taxable at the state and federal levels. Corporate bonds usually pay higher interest rates than government bonds because there is a chance that the company could default on the bond. High-yield bonds, also called junk bonds, are corporate bonds that are issued by companies with below-investment-grade credit ratings. If low interest rates have your income down, bonds could help you increase your cash flow. If you would like to know which types of bonds would be best for your situation, please check off on the coupon. -------------------------------------------------------------------------- How Much Life Insurance Do You Need? The amount of life insurance you need is based on your family status, age, and economic situation. For instance, someone who is retired with only one dependent will probably require less insurance than the breadwinner of a family of six. You need to consider the costs, evaluate the benefits, and make your own decision as to how much life insurance is necessary for your particular situation. One of the best ways to get an idea of how much life insurance you should have is to do a “needs-based analysis.” This will give you a snapshot of your survivor’s situation in the event of your death. A “needs-based analysis” will review the following: -- Life insurance proceeds-How much will your survivor receive from policies on your life? Don’t forget to include policies from your employer or those as part of a retirement package. -- Personal assets-What assets do you own that your survivor could sell to provide income or pay final expenses? This may include real estate, retirement plans, mutual funds, and bank accounts. Remember, if the estate is subject to estate taxes, the IRS needs payment within 9 months. Would that be enough time to sell a business or property? -- Special bequests-Are there any gifts you want to make to charities, for example, or to pay for a grandchild’s education? -- Debts and final expenses-Are there mortgages, auto loans, credit cards, medical bills, and estate taxes that will have to be paid when you die? -- Annual expenses-How much income will your survivor need each year, including taxes? Review your current expenses and deduct those that will be eliminated after your death. -- Annual income-How much income will your survivor receive each year? This could include Social Security, pensions, annuities, rental income, and salary. Will this income keep up with inflation? Social Security and many pensions have cost-of-living adjustments. Salaries may or may not go up. -- Survivor’s age-How long might your survivor live? Industry mortality tables can provide you with guidelines. -- Rate of return on assets-Would your survivor be a conservative, a moderate, or an aggressive investor? A 2% or 3 % higher rate of return can make a big difference in his or her income over ten or twenty years. To figure out if you should own life insurance for any of the above purposes, return the enclosed coupon or call the office for an appointment. While some people think they could not qualify for insurance for health reasons, you will be pleasantly surprised by the flexible options. -------------------------------------------------------------------------- Are Your Mutual Fund’s Expenses Going the Wrong Direction? If you regularly read financial magazines and advice columns in your newspaper, you could not avoid seeing pieces about mutual fund fees. Experts give their opinions on which funds charge too much, which ones charge a reasonable fee, and what you should look for when buying a mutual fund. And I’m assuming you thought about their advice before investing in your fund. But have you looked into whether or not your fund’s fees are going up or down each year? You might be surprised at the answer. During the first few months of each year, you receive your fund’s previous year’s annual report. With a little digging you can use this report to check how good your fund’s managers are controlling the expenses when compared to the growth of the fund. Without worrying about how your fund’s expenses stack up against those of other mutual funds, take a look at the fund’s history. How do the current expenses look in contrast to those of past years? The numbers you need are generally listed in a table, called Financial Highlights, which can be in the front or back of the fund’s report. You want to look for “ratio of expenses to average net assets” for a comparison of the most recent expense ratio with that of the past years. The expense ratio is based on daily assets under management. Is it dropping, as you would expect, when assets under management have increased? Or is the ratio rising while the amount of assets hasn’t changed? An increase in expenses might be justified, though. For instance, a global fund may expand into a new market that could require up-front costs. In such a case, it should be brought out in the report. For help in learning if your fund’s managers care about expenses as much as you do, return the enclosed coupon, listing your funds, for an analysis. |
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| © 2001, 2002 Strictly Business Magazine All Rights Reserved. A division of S&S Enterprises, a Floyd Snyder Production. Santa Maria, California, 93454 Feedback. |
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| Senior Finances Specializing in Investment Management and Asset Preservation For Mature Investors Published by: |
| Trent J. Benedetti, C.P.A., C.F.P. |
| Benedetti & Associates Certified Public Accountant,Inc. 2151 S. College Drive, Suite 101 P.O.Box 5958 Santa Maria Ca. 93456 Tele: (805) 922-4881 Fax: (805) 922-7953 Email Mr. Benedetti |
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