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Millionaire Now! by Larry NusbaumThis blog is based on the organizational principles found in my new book, "Millionaire Now! - A Financial Toolbox with Seven Steps to Wealth". |
Is it possible to build your own structured product stocks?
Yes! In fact, it's not very hard. There's only two ingredients. You just mix them together and you're done. http://millionairenowbook.blogspot.com/
1st Ingredient
The first ingredient is a bond that you buy at a price less than its maturity value. The Wall Street name for this type of bond is a "Zero Coupon Bond" or "strip bond".? A Zero Coupon Bond makes no interest payments during its life.? Rather, the bond returns the investor's original investment plus all of the interest income only at maturity. You can buy zero coupon bonds through most online discount brokers.
The best type of zero coupon "bonds" for individual investors are simple and boring bank Certificate of Deposits ("CDs"). If you know where to look (www.BankRate.com), you can buy bank CDs at interest rates much greater than US or corporate zero coupon bonds.
Example of a "Zero Coupon" Bank CD: You buy a CD from a bank for $8,500. At maturity the bank will pay you $10,000. The difference between the original $8,500 investment and the $10,000 payment at maturity is interest income ($1,500).
2nd Ingredient
The second ingredient is a call option on a stock index. A call option increases in value if the stock index increases in value. If the stock index decreases in value, the call option will also decrease in value. A key point is that the option buyer has limited risk. He will never lose more than what he paid for the option.
So creating a structured product is a two step process:
Step 1: You buy a bank CD
Step 2: You buy a call option on a stock index.
Example: You have $10,000 to invest. First you buy a three-year bank CD for $8,500. Next, you take the remaining $1,500 ($10,000 - $8,500) and buy a three-year stock index call option.
$ 8,500 Purchase of a three-year bank CD
$1500Purchase of a three-year call option
$10,000 Total Investment
At the end of three years, the bank CD will have earned $1,500 in interest income. Therefore, you'll receive $10,000 from the bank at the end of the three years.
If the stock index decreases 50% by maturity in three years, the call option will expire worthless. However, your bank CD, increasing to $10,000 at maturity, will leave your original $10,000 investment intact.
If the stock index increases by maturity, the call option will also increase in value. Let's assume the stock index increases and the call option is worth $3,500 at maturity. Combining the $3,500 from the maturing call option along with the $10,000 from the maturing bank CD will provide you with a total of $13,500 at maturity...an increase of $3,500 or 35% from your original $10,000 investment.
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- "Who Is Next?" By Dick Bove
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- Build Your Financial Plan
- RETIRE RICH: Survival Guide
- ASSET ALLOCATION MODEL
- THE BIG ROLLOVER IS HERE
- THE END OF THE GRAND SUPERCYCLE?
NOTE: Please click on the charts below to enlarge them if [read more]
NOTE: Please click on the charts below to enlarge them i [read more]
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