I’ve been writing a series of short articles on bonds and the Yield Curve on Whatsapp. This is the first post with 4 of these articles.
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The Yield Curve – 1
There has been a lot of interest in this topic because the US Yield Curve has ‘inverted’. I have studied this in a course on Finance and found it fascinating. This is hoping I can explain it in simple terms.
Firstly, the ‘debt’ or bond market is the largest financial market. I thought it would be the stock market. I prefer to invest 100% in the stock or real estate markets. But then I learnt that people invest in stock markets to create wealth. The really wealthy invest mostly in the bonds to preserve their wealth. So, understanding the bond markets is very important, even if you don’t invest in bonds!
The Yield Curve – 2
What is a bond? In simple words, a bond is a loan. It may be referred to by different names. Debentures, fixed deposits, credit card, etc are all forms of loans. Bonds have three features – Value (price of one bond), Term (how many years the bond has been issued for) and Coupon rate (the interest rate that will be paid). If you have a Fixed Deposit of Rs.5000 for 3 years at 8.5% interest rate, then the bond that you have has a value of Rs.5000, for a term of 3 years and a coupon rate of 8.5%. Whenever you swipe your credit card or keep a fixed deposit, think of it as a ‘loan’. When you do this, a different part of your brain lights up. The ‘risk’ element comes into focus. Questions like ‘Can I repay this money?’ ‘How stable is this company or bank and will they be able to repay my money’ come to mind. So, instead of an automatic habit, a little thought goes into it.
The Yield Curve – 3
Yesterday, I used the words ‘Credit Card’ and said it was basically a loan. So, I got a few responses. So, I’ve decided to digress a bit for today and tomorrow’s posts. I want to make it about Credit Cards. You will notice that the words ‘debt’ and ‘loan’ will never feature on any of their paperwork or ads, but the word ‘credit’ figures predominantly. It gives the impression that you’ve got the card because you’re special. In fact, sometime back, a cat in London had got a credit card in its name. That still would be understandable, but for the fact that it had died six years back!! They are given to people saying “It will build your credit and it will be easier to get a home loan” – nothing could be farther from the truth. The home loan companies do not look at your credit card statements. Also, people say “I pay up the outstanding amount in full every month, so I am using the money for free”. The card companies employ behavioral scientists and the reward points, EMI offers, spot discounts, cash backs, etc ensure that we spend around 47% more when we use a card than when we pay in cash. After all, it hurts a lot more paying Rs.3000/- cash for a shirt!
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The Yield Curve – 4
This is the last one on Credit Cards before going back to the Yield Curve. Three points.
1. If you cannot pay up your credit card balance in full at the end of the free period, withdraw from other savings like FDs, MFs, etc and pay it up. The interest rate is above 36% for the carry over, which you will never get in any investment.
2. Generally, the bank that you have an account at, gives you a credit card. For some reason, maybe a dispute about a charge, if you do not pay the balance on your credit card, the bank can deduct it from your account. Yes – it is mentioned in the hazaar documents that you blindly sign. The solution is to take the credit card and after a couple of years, close down the account. Never have an account with the bank that issues you the card. They cannot take out the money from another bank!
3. If the credit card is in the spouse’s name and he / she dies, you are not liable to pay up any balance on that card. A credit card, like a personal loan, is an ‘unsecured’ loan. It dies along with the person who has taken it. Of course, the remaining spouse will get threatening calls and also visits from recovery agents. The solution is to record the calls and if necessary, lodge a police complaint.
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