and she said.. "how you interpret the dream is probably more important than the dream itself"

On bonds and interest rates.

I've noticed more and more of my friends getting interested and excited about investing. This is definitely a Good Thing (tm). Nevertheless, sometimes things can get a little overboard.. especially when you're first starting out. When you're saving $1000 in a money market, for example, it is less important whether you are getting 4% or 5% then the fact that you are actually saving money.

A friend recently asked me some questions regarding APY, APR, and bonds versus money market accounts. I figured I might as well share with my other friends who might wander by.

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The differnece between APR (annual percentage rate) and APY (annual percentage yield) is that APR is the percentage you are being given but APY is the percentage you realize.

Basically, if you get 1% interest per month you could state this as 12% per year.. the APR would be 12% but the APY (which takes into account compounding interest) would be 12.68%.

This is because after the first month you have 101% of your original investment (100% + 1%), the second month you have 102.01% - slightly more than 102% - because you are also getting 1% interest on the previous-months 1% interest as well as the principal.. after 12 months, that ends up being an extra .68%.

Lesson learned: the more periodic the compounding interest, the better (but really not much). 12% compounded daily (365 times in a year) has an APY of 12.75% compared to 12.68% compounded monthly..

Your money market may have given you a rate when you opened it but it is not fixed - it can fluctuate day to day, following the market.

You might consider: when interest rates go up (as they have been over the last year or two .. I used to get 3.4% in my money market and now I'm in the 4.5% range) bond value goes down - this is because the bond has a FIXED rate (say, 4%).. when you bought it the bond was fixed at that rate relative to the interest rate AT THAT TIME (say it was also 4%). If the interest rate is NOW higher (say, 5%), then the 4% fixed rate doesn't justify someone buying your bond from you at it's face value - you need to make it worth their while to purchase the (low) future profits by letting it go for cheaper.

Of course the inverse is true.. bond values go up as interest rates fall.

So the real questions are: do you forsee rising interest rates over the term of your bonds (and if so, how long is the term - is it long enough to justify selling at a low value now to take advantage of the potentially much higher interest rates in the future)... or do you think interest rates will taper off.

The real bottom line here, of course, is if you're talking about one to five years and $1000, the total difference is basically nothing.. even over 5 years you probably won't see a $100 difference between choosing the worst option and choosing the best option (if you could see the future).

The good thing is to a) save and invest and b) let your money make money for you. Don't worry too much about getting the absolute best rate - it's not worth your time and effort, leave that to Warren Buffer. You could move your money to a new money market every other day, as different banks' rates changed.. but for what? Your time is worth money too.

Work an hour of overtime and forget you ever worried about it.