Week 10 - Today, Tomorrow, and Yesterday

Week of April 2nd, 2009

The effects of inflation in nominal vs. real rates

Inflation is becoming a concern for the future of investments. Corporate Investment Grade bonds are a fairly good investment, until you consider inflation. If the bond is stated at 5.5% and inflation is 6%, who would want that investment. Obviously, the price of the bond will fall until the price matches the market. For example, anyone forced to sell their bond at these deep discounts will lose money in nominal terms, while those holding out to maturity will lose money in real terms.
As the government prints more money, our current low inflation rate will be seen no more. They are making a lot of bets on that inflation rate remaining low. Also, if one of the investment grade companies can't pay some bills, the price of their bonds will fall even more. If bankruptcy is in the future, they have a higher chance of getting paid than equity owners, but they will still incur some losses.
http://online.wsj.com/article/SB123879540430687915.html

Warranties on "captial projects"

In our current economic state, families are focusing on smaller if any purchases. They aren't buying a new car, their getting the one they have fixed. They aren't buying new appliances, they're getting the old ones fixed. Hopefully, you took a gamble and bought the extended warranty. An article titled "Is added warranty worth the cost?" takes a look at the gamble of purchasing a warranty.
If you bought the warranty, and something went wrong you were satisfied. If you bought it and time passed without a hitch, you threw your money out the window. The director at consumer reports says that there is not much difference between the cost of the warranty and minor repairs. There is also a slim chance that there will be a problem during the warranty time frame. But 60% of Americans spend that extra money on the warranty for big-ticket items. But there is a shift toward becoming "keepers" vs. "tossers." More and more people are buying for quality rather than price.
http://online.wsj.com/article/SB122981203258724227.html