Re: Real Return Bonds - Availability from BMO

In article <[EMAIL PROTECTED]>, investmentpro_not
<[EMAIL PROTECTED]> wrote:

> "Greg Goss" <[EMAIL PROTECTED]> wrote
> >
> > "Stripped" Real return bonds are considerably rarer, but more
> > convenient.  I hold both 2026 whole RRB and stripped 2021 RRB in my
> > TDW account.
> >
> > If you can find 2021 strips, your entry
> > point can be much less.  My strips were bought for $3500 or so.
> 
> I don't fully understand RRB,s. Could you explain just how these work (whole
> & stripped)?
> Lets say I buy $20,000 in whole & same in stripped today. Say 2026 bonds.
> 
> What will the return be in each case based on current interest and inflation
> rates?
> 
> How often is interest distributed?
> 
> Can these be traded in the normal way?

Before you get all excited and rush out to buy RRBs, ask yourself a
question.  What is your personal inflation rate?  Determine this
*BEFORE* you do anything else.

The published inflation rate is just an average of all items.  And with
all averages, certain low deflation rate items can drag down other
higher inflation rate items in the index.  

Take computers and electronics in general for example.  They are
getting cheaper!  What you buy today will be massively discounted the
next year.  And yet, this deflation rate is reflected on other mass
produced no growth items like toasters and bedsheets.  Still people buy
them right?  And yet, there are items that hold its price power and in
fact do increases at a substantial rate higher than the published
average inflation rate.  As a shopper, you know or get the feeling that
inflation rate is higher than it seems.  In all likelyhood, it is.  
Here is the problem with average inflation rate.  If this rate is used
by most employers to determine salary increases, why then most workers
still feel that's not enough, eventhough they reduce spending to the
bare minimum.

Most of the deflated rate came from materialistic goods that we already
own.  Inflation only rises if the demand outstripped supply.  It does
not do squat with supply outstripping demand.

Most of the inflation I think are coming from the booming house sector. 
But that in itself won't last forever.  People are getting ever deeper
into debt and there's only so much people can afford.  And unlike
younger people, most baby boomers are already house poor with only a
few that are fortunate enough to move up.  Suffice to say, the trend
seemed to suggest low inflation rate for the forseeable future with
probably some up-spikes along the way.  But this trend does not
coincide with my personal inflation rate.

My personal inflation rate is about 6% compounded, and that is based on
average calculation of my 10 years expenditure recorded on my notebook. 
It is interesting to see that it does not coincide with the current
inflation rate, because I don't buy a new computer every six months, I
don't need to buy a house as I own and paid for my own and I don't
smoke nor do I drive a car (I cycle to work or take transit). 
A good example would be, I love watching movies.
On July 4th, 1996, it costed me $4.99 tax incld to watch Independence
Day in a theatre with no pop or popcorn included.  On Nov 15th, 2003,
it costed me $9.00 tax includ to watch Master & Commander (nice movie
btw) in the SAME theatre and same time slot.  You do the math.  The
price & taxes combined had inflated from 1996 to 2003 (a span of only 7
years) at a compounded rate of 8.9%!  So if this trend continues, I may
have to pay $16 to watch a new flick in the same theatre in 2010. 
Technology may eventually replace theatres with movies-on-demand over
the net.  That may drive down prices and curb piracy, but there are
some that technology can not replace yet.  Until then, they will still
command a price premium.

All I am saying is this, Real Return Bonds are good vehicles in high
inflation situation where you need to protect your purchasing power. 
The problem becomes, when your purchasing power deminishes EVENTHOUGH
you are living in a low inflation era.  The Real Return Bonds would do
you no good.
And besides, stripped RRBs are supposed to be kept inside your RRSP
since the final mature value will only be realized at the maturity
date, which is unlike regular bonds which pays you annual or
semi-annual *non-compounded* income until held to maturity or sold
before then.