Tuesday, August 24, 2010

Fundamentals of Investment Valuation

As we saw in Bond Basics, a bond typically represents an obligation by the borrower to pay fixed amounts of interest on fixed dates, and to repay the principal amount when the bond matures. The relative certainty of the amounts and dates is the major advantage of bonds compared to other possible investments. Bond valuation, then, is assigning a value or price to this stream of payments.

Intro to Present Value: What is $105 a Year from Now Worth to You Now?

The key to pricing bonds is the concept of Present Value, or PV. Suppose you can earn 5% interest and you have $100. From the bond basics post we know that interest = principal x rate x time. So, in one year $100 will earn ($100 x 5% x 1 =) $5 in interest.

Therefore, a year from now you can have $105 -- your original $100, plus $5 in interest. It is in that sense that the "present value" of $105 a year from now is said to be $100; $105 a year from now is worth $100 today. Note that the

Sunday, August 1, 2010

August 2010 Stock Market Update

100 Year Dow Chart with 25-Year Moving Average

Graph of stock market 25-year moving average
Dow 25-Year Moving Average

Above is a very long-term chart of the Dow, including the 25-year moving average (click chart to expand); it uses this past month's close for this year's close. It shows that the market rarely falls very far below its 25-year moving average.

July, Year-To-Date & Recovery-To-Date Review

Note: click here for August Data

In early March 2009, I posted Dow At 25-Year Moving Average. The Dow continued lower for several more days before bottoming at 6547 on March 9 --