@@evdge1 By nassy do you mean Nasdaq? Yeah I agree things might not be the best right now. But just like you can sail into the wind, I would suppose that bear markets can present their own opportunities…
Hi, thank you so much for the video Sal! I would just like to add on in case anyone was struggling to make sense of the inverse relationship between interest rates and bond prices like I did. You can think of it as the following scenarios: 1) If interest rates in general fall, the bond's interest rates become more attractive, so people will bid up the price of the bond. 2) Likewise, if interest rates rise, people will no longer prefer the lower fixed interest rate paid by a bond, and their price will fall. Hope this helps :)
Older bond will trade-at-discount-to-par ( ie older bond price falls) , when interest rates rise (for newer bonds) Older bond will trade-at-premium-to-par ( ie older bond price rises) , when interest rates fall (for newer bonds)
So hypothetically does that means that we should buy bonds when the interest rate is the highest as one can profit from rising bond price when interest rate comes down ?
나도 미국에서 수년가 칸아카데미 이용했던 사람으로서 이 칸 선생님응 진짜 존경한다. 미국은 달라... 이분은 공짜 무료 로 이런거 갈키는데 거의 창시자임... 미국이어서 가능 한국에서는 절대 불가능... 대학교육만 봐도 미국대학 근처에 한국처럼 술집 번화가 자체가 생겨날수 없음 그냥 닥치고 아닥하고 공부 ... 기본적으로 전문대 강사라도 해도 미국에서의 교육에대한 자부심이 쩔고 .. 내대학의 경우도 통계교수가 얘기했던게 우리가 미국에서 티칭 스킬이 10위권이다 올해는 14위로 내려갔다 이러면서 점수를 안주려고 하지만 학점에 관계없이 어려워도 이런 교수들 만나 의미있는 교육 받고 공부했다는거에 자부심이 든다. 이 칸 선생님때문에 인도사람들이 더욱 친근해지고 조아졌었징 똑똑합니다 진짜 수학 25구구단이었던가 25진법인가 까지 외우는 나라. 한국은 진짜 달라져야돼 자기 밥그릇만 챙기면 더이상 미래가 없음. 공무원 마니 뽑지 말고 중소기업 마니 뽑아요
Love it ! Finally now i get it ... also watched bonds explained . I have no finance education backgroud but i am now in the mortgage industry and i can definitely benefit from this !
If you're looking for his not math succinct explanation: When the interest rate goes up, people expect more return from the bonds which don’t give more because they were issued at a lower interest rate time therefore their price go down (trades at a discount to par). When the interest rates goes down, the bonds issued in the higher interest rate time yield above expectations to they go up in value (trading at a premium).
Fed has a targeted interest rate and this is always in line with inflation. However, Fed cannot control the forces of demand and supply. Hence, real market activities would determine the actual interest rate.
At minute 3:30 you don't explain why you expect a 15% interst rate on the bond if FedFunds Rate have risen. Why would I care about the price I have to pay to borrow money if what I'm doing is LENDING to the Company A?
fed rates rising mean the cost to borrow for banks go up, in turn makes the market expect a higher return for increased risk and inflation. you would want it to be on par with current rate otherwise the face value will go down making it worth less.
Can someone correct me if I'm wrong? The movement of 'general interest rates' seems to have both short term and long term effects on bonds. If you already hold a lot of bonds, you are happy to see interest rates fall, because yours yield more than the current market, so their price will go up [you could sell them for a quick profit if you wanted]. On the flip side, that same person would be sad about their current bond holdings paying less interest than everyone else's rising interest rates, so their value [price] will go down [and their yield for a new buyer will increase]. Can we summarize this by saying that: rising interest rates are bad for current bond holders and good for people who want to load up on newly 'printed' bonds? [bonds are going 'on sale' -- hence 'a discount' in this environment] I find it quite hard to wrap my head around how yield, rates, and price all seem to move opposite each other. I have to talk it through step by step to myself. It doesn't feel intuitive. It's like when people use the term 20th century. I have to manually tell myself that it is the 1900's :P
What a brilliant way of explaining the present value of a bond using discounted cash flows, without even introducing it as an NPV of a bond. This inductive reasoning is brilliant. PV of Zero Coupon Bonds= Bond's Price/(1+R) where R= Coupon Payments PV of Normal Bond= Bond's Coupon payments/ (1+R)^t +Bond's Principal/ (1+R)^t t= number of years Every time the interest rate, or discount rates, increase, the price of a bond, or its present value decreases. We also have to distinguish between: Current Yield= Annual Coupon Payments/Current Market Price of a Bond Yield to Maturity= [Cash-Flows + (F+P/Number of years to Maturity) / (F+P/2) where F: Face Value of a bond P= Market Price of a bond When the credit issuers are solvent and there's no or every small change of default, then there bonds' yields are lower while their prices are higher. This is because they will most likely pay their debt obligations. That's the reasons economically-weak countries like Greece, Spain, Portugal and Argentina offer very high yields on their bonds.
Why does interest rate change? Is it the federal interest rate we’re talking about or the company changing the rate? Also it is the coupon rate that is changing, not the yield to maturity right? Thank you
this is a very good question, the Bond market however contains some speculative behavior as well. Even tho Official Cash Rate changes, sometimes banks and other investing companies just wont budge their Retail Rate. but people react to the OCR by dumping the Junk or Long Term Bonds nontheless
The issue with this video that it discusses traditional market theory when everything now a days is anything but traditional. I understand why people are so thankful for this videos judging from the comment section but honestly I found the explanation complicated because it glosses over the fact that its basing its reasoning on very simple examples. These simple examples actually complicate and obfuscates the underlying principles when you try to apply to real world economics nowadays. I'm only trying to balance all the yes-man comments to give a more balanced view of the material. Seems like everyone just says "SWEET! Thanks!!"
Well, you always start from simple examples and work your way up I guess. Starting from complex ones would throw-off a beginner. If you've got a way of starting off with the practical and complicated mess, do guide through an example. Or if there's another explanation on youtube...
Hopefully I found that helpful?!?! My man. Not only have you taught me medicine, you taught me business. And bonus points for the ole TI-85 calculator. When does Khan academy start printing diplomas?
this guy is a lifesaver. btw can anyone can confirm what interest rate here mean? is it interest rate in general or it refers to fed funds interest rate/ prime interest rate?
not sure about helpful in regard to what the price is at the two year mark, but definitely explains the math needed to calculate the reasoning which is what is was wanting to know. Cheers.
Can anyone tell me please- At 4:00 Here if I am asking Sal to buy this bond does it mean I am selling this $1000 bond which I purchased earlier from any bank??
Shambhu Neupane: Yes, anything which is not too out of my control I am happy with my knowing this is not a chance game like the stock market, or worse, an individual stock. When you touch it, especially a rising market, there is no guarantee that it will do what you desire. Bonds are not a "greedy" vehicle. These are a nexus to the sound rewards it provides.
Guys can someone explain me how the price on the bond will change if we have $1000 face value duraturation 5. The interest rate increase by 1% How it will change the price?
BEST TRADING ADVICE AND RECOMMENDATION FOR YOU Greetings I’m from NY, i accumulated a lot of losses from trying to trade alone to buying bad signals and it's never advisable to enter the market without basic knowledge because it's quite complex as a beginner and you ought to understand the market trends and different algorithm. Many people have made wrong investment and trading without getting the proper knowledge of what the stock market/ forex trading is, some have lost billions of dollars in the stock market and some are still loosing due to bad investment advice. I never believed l'll make up-to $18,000 in just 1 week from trading with Mr Hercules he guided me for free with his strategy and he guides me with the exact time frame to trade and now I just received my first withdrawals $18k in my bank account today I'm very happy I recommend you contact him now he is very honest and trustworthy he will guide you to make consistent profit. (elvishercules48@gmail.com)
Thanks for the video. I believed that with interest rates going down it would want to drive bond holders from bonds and elsewhere due to the low yield, I guess it is true with bonds with variable rate.
Kahn helped me back in high school; now he’s helping me navigate the markets. Can’t get rid of this guy.
Haha, great comment!
Sameeeee. A big help in navigating and understanding the market concepts which I should have learned in school.
Hey I'm just curious, how has investing been going?
@@PunmasterSTP horrible lmao nassy falling 3% everyday
@@evdge1 By nassy do you mean Nasdaq? Yeah I agree things might not be the best right now. But just like you can sail into the wind, I would suppose that bear markets can present their own opportunities…
Hi, thank you so much for the video Sal!
I would just like to add on in case anyone was struggling to make sense of the inverse relationship between interest rates and bond prices like I did. You can think of it as the following scenarios:
1) If interest rates in general fall, the bond's interest rates become more attractive, so people will bid up the price of the bond.
2) Likewise, if interest rates rise, people will no longer prefer the lower fixed interest rate paid by a bond, and their price will fall.
Hope this helps :)
thanks!
Thank you
Still don't get it
This cleared it up for me. Thanks for the finishing touch kind sir!
Hi Derek,
Can you please explain what do you mean by interest rate here?
Thanks for explaining the SVB issue 9 years ago. Makes sense
Exactly why I came... So I could get a better understanding of what happened❤👍
hehe
SVB brought me here 😅
Older bond will trade-at-discount-to-par ( ie older bond price falls) , when interest rates rise (for newer bonds)
Older bond will trade-at-premium-to-par ( ie older bond price rises) , when interest rates fall (for newer bonds)
So hypothetically does that means that we should buy bonds when the interest rate is the highest as one can profit from rising bond price when interest rate comes down ?
@@kingwoo1900 Exactly. I think like in this way too
Boom! Thanks. I now know more about economics than Janet Yellen!
나도 미국에서 수년가 칸아카데미 이용했던 사람으로서 이 칸 선생님응 진짜 존경한다. 미국은 달라... 이분은 공짜 무료 로 이런거 갈키는데 거의 창시자임... 미국이어서 가능 한국에서는 절대 불가능... 대학교육만 봐도 미국대학 근처에 한국처럼 술집 번화가 자체가 생겨날수 없음 그냥 닥치고 아닥하고 공부 ... 기본적으로 전문대 강사라도 해도 미국에서의 교육에대한 자부심이 쩔고 .. 내대학의 경우도 통계교수가 얘기했던게 우리가 미국에서 티칭 스킬이 10위권이다 올해는 14위로 내려갔다 이러면서 점수를 안주려고 하지만 학점에 관계없이 어려워도 이런 교수들 만나 의미있는 교육 받고 공부했다는거에 자부심이 든다. 이 칸 선생님때문에 인도사람들이 더욱 친근해지고 조아졌었징 똑똑합니다 진짜 수학 25구구단이었던가 25진법인가 까지 외우는 나라. 한국은 진짜 달라져야돼 자기 밥그릇만 챙기면 더이상 미래가 없음. 공무원 마니 뽑지 말고 중소기업 마니 뽑아요
Kahn is great and Sal is a good man
Is this the smartest guy alive ? How does he know every concept
Julian Hilgemann textbooks + genetics + will
@Donald Borum is that hard
@@ITALIANO0110 obviously! Extremely difficult. Also, requires a lot of hard work.
@@DaBestAround sorry i meant MIT is it harder than other unis
He was a Portfolio Manager at a hedge fund
now the real question is where can i find that 15% coupon bond lol
ANGL junk bond etf
I would even take 10%
@@dantheman4011 I would even take 5% given that currently, the interest rate on 30 year US bond is 2.34% & 1.6% on a 10-year bond.
@@ronniebine1325 which barely covers inflation.
@@dantheman4011 Inflation will shoot up soon as theres no chance that FED can reduce it's balance sheet. Gold is on the way to shoot to the moon.
Finally somebody's able to put it in language I understand. Thanks!
I don't know why I go to school. Why is it so much easier for me to learn from Khan Academy? ?!?!
and free
Thank you... I came here because of SVB... And now I understand😁👍
This was the best video that explains the relationship between Bond and interest rates in a simple term so that one can understand.❤
My god... After hours and hours of reading my text book and beating myself in the face with my fist I get it. Wish I had watched this video first.
Khan academy is actually the goat. I’ve been using Khan for over 5 years now
This explanation is a God sent explanation. Well done!
His writing is so pretty 🤩 every symbol is perfect!
This video is a gem!
Quantitive easing makes sense now. Buying bonds increases their value thus bringing down the yield!
This guy is a genius. He teaches economics and math... insane
He knows everything. Just love Khan Academy
Love it ! Finally now i get it ... also watched bonds explained . I have no finance education backgroud but i am now in the mortgage industry and i can definitely benefit from this !
I've slowly invested more into bond funds as central banks slowly cut interest rates since late 2018.
@@nagasako7 I came across your comment and was just curious. If I might ask, how has your investing been going?
The best video you can find on RUclips about the relationship between interest rates and bond prices.
If i have a teacher like you i never feel finance is difficult from nepal😭😭😭😭🇳🇵🇳🇵🇳🇵
THANK YOU. It took me over a half dozen videos to find this one that makes sense of this insanity. It shows the relationship in real numbers.
Great video I finally get it thank you so much!
If you're looking for his not math succinct explanation:
When the interest rate goes up, people expect more return from the bonds which don’t give more because they were issued at a lower interest rate time therefore their price go down (trades at a discount to par).
When the interest rates goes down, the bonds issued in the higher interest rate time yield above expectations to they go up in value (trading at a premium).
Now is the time to start buying bonds
yes but im worried about inflation in next yr..i have ANGL ETF
people at Khan academy are such good teachers
This is REALLY applying to what’s happing today. Glad it showed up on my RUclips feed.
Who’s here after the drop in the market despite Feds saying interest rates would stay low until 2023?
LOOOOOOOOOOOOOOOOL
Fed has a targeted interest rate and this is always in line with inflation. However, Fed cannot control the forces of demand and supply. Hence, real market activities would determine the actual interest rate.
At minute 3:30 you don't explain why you expect a 15% interst rate on the bond if FedFunds Rate have risen. Why would I care about the price I have to pay to borrow money if what I'm doing is LENDING to the Company A?
fed rates rising mean the cost to borrow for banks go up, in turn makes the market expect a higher return for increased risk and inflation. you would want it to be on par with current rate otherwise the face value will go down making it worth less.
i have an exam in acct intermediate 2 tomorrow and i think this video just saved me LOL thank u Sal
Thanks a lot for making this one! Just in time too, got stuck on my financing course and you pop up some videos.
A great explanation on the effect of interest rates on bond prices. I really needed this👏👏
Well explained here, i now understand better
Each time I see you, I get light from your eyes.
Can someone correct me if I'm wrong?
The movement of 'general interest rates' seems to have both short term and long term effects on bonds. If you already hold a lot of bonds, you are happy to see interest rates fall, because yours yield more than the current market, so their price will go up [you could sell them for a quick profit if you wanted].
On the flip side, that same person would be sad about their current bond holdings paying less interest than everyone else's rising interest rates, so their value [price] will go down [and their yield for a new buyer will increase].
Can we summarize this by saying that: rising interest rates are bad for current bond holders and good for people who want to load up on newly 'printed' bonds? [bonds are going 'on sale' -- hence 'a discount' in this environment]
I find it quite hard to wrap my head around how yield, rates, and price all seem to move opposite each other. I have to talk it through step by step to myself. It doesn't feel intuitive. It's like when people use the term 20th century. I have to manually tell myself that it is the 1900's :P
twin
Best explanation available! Thanks a ton!
Never thought Id watch another Khan Academy video again in my life.
You don't know what you are missing
Thanks for saving my life ❤
I just the way u explained… simple terms n clearly …
Very well explained 💯♥️
Omg you made it simple.thank you so much
It helped sir.
I was stuck in economics for 3 constant days.
Thanks.
I am proudly saying Bangladeshi , Khan come from the same country.
What a brilliant way of explaining the present value of a bond using discounted cash flows, without even introducing it as an NPV of a bond. This inductive reasoning is brilliant.
PV of Zero Coupon Bonds= Bond's Price/(1+R) where R= Coupon Payments
PV of Normal Bond= Bond's Coupon payments/ (1+R)^t +Bond's Principal/ (1+R)^t
t= number of years
Every time the interest rate, or discount rates, increase, the price of a bond, or its present value decreases.
We also have to distinguish between:
Current Yield= Annual Coupon Payments/Current Market Price of a Bond
Yield to Maturity= [Cash-Flows + (F+P/Number of years to Maturity) / (F+P/2)
where F: Face Value of a bond
P= Market Price of a bond
When the credit issuers are solvent and there's no or every small change of default, then there bonds' yields are lower while their prices are higher. This is because they will most likely pay their debt obligations.
That's the reasons economically-weak countries like Greece, Spain, Portugal and Argentina offer very high yields on their bonds.
In other words - staking shitcoins
Thanks Khan Academy! You saved my finance class :P
Very well explained, what could take someone hours in the library to understand, you do that in 13 minutes, thank you very much.
Brilliance man. Really thank you ❤️
A TI-85?? So nostalgic. They stopped making those a while ago. (I kept mine, I still have it).
Sick calculator. Nicely explained aswell.
Wow 🤩 I understand. Good explanation. Took two times though 🤯
Very good and easy explanation. Cheers.
Loved this♥️
3:12 You sure about that Sal?
That was really useful thanks. I understood it before, but this was so clear and concrete.
This is perfect. Thanks!
Finally, I get it! Thanks!
you are my saviour
very helpful. thank you
Why does interest rate change? Is it the federal interest rate we’re talking about or the company changing the rate? Also it is the coupon rate that is changing, not the yield to maturity right? Thank you
this is a very good question, the Bond market however contains some speculative behavior as well. Even tho Official Cash Rate changes, sometimes banks and other investing companies just wont budge their Retail Rate. but people react to the OCR by dumping the Junk or Long Term Bonds nontheless
The issue with this video that it discusses traditional market theory when everything now a days is anything but traditional. I understand why people are so thankful for this videos judging from the comment section but honestly I found the explanation complicated because it glosses over the fact that its basing its reasoning on very simple examples. These simple examples actually complicate and obfuscates the underlying principles when you try to apply to real world economics nowadays. I'm only trying to balance all the yes-man comments to give a more balanced view of the material. Seems like everyone just says "SWEET! Thanks!!"
Well, you always start from simple examples and work your way up I guess. Starting from complex ones would throw-off a beginner. If you've got a way of starting off with the practical and complicated mess, do guide through an example. Or if there's another explanation on youtube...
Hands down the best explanation of bond price fluctuation with an excellent mathematical demonstration. Thank you so much.
Great teacher, thank you for contributing !
Finally my concepts are clear ✌️
Bond prices and interest rates? More like "Better and profound information that's great!" Thanks for everything you do Sal.
At 9:12, it is assumed that we reinvest the interest? Otherwise, why should we compound?
amazingly clear explanation. Thanks so much
Awesome video! Thank you!!!
I loved your explanation. This made sense to me.
VERY GOOD VIDEO
Exactly the kind of lesson I was looking for. Thank you.
Great work!!
Simple and straightforward explanation, thanks.
Hopefully I found that helpful?!?! My man. Not only have you taught me medicine, you taught me business. And bonus points for the ole TI-85 calculator. When does Khan academy start printing diplomas?
Huh. Good explanation. Definitely found that helpful.
Understood. Well explained
Very lucidly described.. thanks.
This was good. The examples were awesome. Thank you
Great Explaination! thank you
Super clear simple explanation in the most profound way.
Great explanation !
Thank you so much! Was really helpful :)
Thank you so muchhhhh🙏👍🏻👍🏻👍🏻
this guy is a lifesaver. btw can anyone can confirm what interest rate here mean? is it interest rate in general or it refers to fed funds interest rate/ prime interest rate?
Great question! I have the same one: who decides if/when interest rate goes up or down??
not sure about helpful in regard to what the price is at the two year mark, but definitely explains the math needed to calculate the reasoning which is what is was wanting to know. Cheers.
Thanks Sejal! That tought me in 12min. what would have taken hours to learn in finance textbook research.
Can anyone tell me please-
At 4:00
Here if I am asking Sal to buy this bond does it mean I am selling this $1000 bond which I purchased earlier from any bank??
Lovely explanation
Awesome splendid
thak youso muchhhh
Yes, it was amazing thanks!
i am happy
Know what your thinking
Shambhu Neupane: Yes, anything which is not too out of my control I am happy with my knowing this is not a chance game like the stock market, or worse, an individual stock. When you touch it, especially a rising market, there is no guarantee that it will do what you desire. Bonds are not a "greedy" vehicle. These are a nexus to the sound rewards it provides.
Guys can someone explain me how the price on the bond will change if we have $1000 face value duraturation 5. The interest rate increase by 1% How it will change the price?
BEST TRADING ADVICE AND RECOMMENDATION
FOR YOU
Greetings I’m from NY, i accumulated a lot of losses from trying to trade alone to buying bad signals and it's never advisable to enter the market without basic knowledge because it's quite complex as a beginner and you ought to understand the market trends and different algorithm. Many people have made wrong investment and trading without getting the proper knowledge of what the stock market/ forex trading is, some have lost billions of dollars in the stock market and some are still loosing due to bad investment advice. I never believed l'll make up-to $18,000 in just 1 week from trading with Mr Hercules he guided me for free with his strategy and he guides me with the exact time frame to trade and now I just received my first withdrawals $18k in my bank account today I'm very happy I recommend you contact him now he is very honest and trustworthy he will guide you to make consistent profit.
(elvishercules48@gmail.com)
Great Video
Thanks for the video. I believed that with interest rates going down it would want to drive bond holders from bonds and elsewhere due to the low yield, I guess it is true with bonds with variable rate.
I have to think very hard to understand the relationship between interest rate and bond prices. Thank you very much.
man you can write with a mouse that good!
Finally got that from you !! thanks much