Investing in Euros – We Analyze
Yesterday, Zoli asked for help. Seeing the euro exchange rate above $ 310 and reading the news, he decided to break his bank deposits and convert his savings into euro for security (16 million).
He found a financial consultant across the Internet (no, not the… Life insurance salesman) who recommended him:
7 + 2% Yield German 3-year and 5-year German bonds, forex trading with euro and physical gold.
Let’s look at the offer, I think you can learn from it:
Is it worth converting forint to euro at this rate?
We do not know the answer to this question. Because there are quite turbulent times, it might have been a good decision, and time will decide.
But it is also possible that everyone will calm down and within a month or two the euro will return to HUF 270, when Zoli has fallen close to two million. At 350 HUF, however, he won the same. In general, I would like to point out that panic is not always a lucky decision.
Is it smart to buy euros?
This is also a point worth considering, as the current crisis is all about the euro. Increasingly, there is every indication that the euro will either disappear or at least undergo a major transformation, so that its future existence, function and exchange rate are all question.
German bond for 7 + 2% interest (yield?).
The recommended bond is a bond from a German real estate company I am unfamiliar with. I ask Zoli what she knows about the company that she dares to entrust all her assets to. Did you study the company’s balance sheet for 2010 and 2009, paying particular attention to the ratio of equity / debt to short-term and long-term liabilities, and did it examine their changes and their trend-like movements? Have you seen how many bonds your company expires in the near future? Have you looked at the size and evolution of trade receivables, the cash flow statement of the company, and calculated the liquidation of the company? Were the company’s income statement and business plan in hand? Have you followed the company’s reputation (business reputation).
Have you read what investors think about the company?
Because if not, why would you want to lend all your money to a completely unknown foreign company? With so much power, he could lend money to the first person on the face, just because he promises a higher interest rate than the bank.
Will you follow the German bond market and corporate news for five years now? If not, how will you find out if your company has been wound up and needs to claim damages as a creditor within 60 days?
If you want to get out of the bond prematurely, will you be able to sell it? How liquid is this bond? What is the spread at which to sell?
Visit the company’s website. On the front page, it says that the company is issuing a 10-year bond at a 6.5% interest rate. If the company gives 6.5% for 10 years, then realistically 4.5-5% for three years. Then how can you buy it from a company with a 9% interest rate?
The answer is simple: in the secondary market, paper rolls below face value, yielding a 9% return. Let’s ask why a 3-year paper is sold at a 9% yield, when 10-year-old Italian government bonds that stagnate close to bankruptcy go “only” 7%.
(Everybody knows that the longer the maturity, the higher the interest rate investors expect? If not, read the brief summary of risks. It would be worthwhile to talk about the bond.)
The 9% rate of return is because that is the risk premium of the company. That is, investors give such a good chance of the company going bankrupt.