Bonds Flashcards
What is the relationship between bond prices and interest rates?
Theres an inverse relationship. When IR increase, newly issued bonds offer high yields making them more attractive, whereas pre-existing bonds become less attractive, decreasing its price.
What is a bond?
It is a piece of paper that guarantees the buyer of the bond 2 things. Regular interest payments and getting the value of the bond back when it matures.
Who issues bonds?
Governments who need to raise finances to facilitate their spending.
Coporations who are looking to invest money but who do not have the retained profits to do so.
Why may people buy bonds?
There may be a higher yield when compared to other financial assets.
It is safer. EG: Its very unlikely for the gov to become bankrupt.
What is the coupon rate?
It is the interest rate fixed over a period of time.
What is the maturity?
It is the period in which the bond should be paid back by.
How do you calculate yields of bonds?
gov bonds
Coupon rate/Market price x100
