Interest rates and bond yield have a negative correlation.. if a bond was issued at 2% interest rate and the interest rate goes up to 3%, the bond yield goes down since it’s less attractive now investment now, I could earn more interest in my savings account than holding onto the bond.. if the interest rate decreases to 1%, that same bond is more attractive now, so the bond yield will increase
Very simple. When interest rate goes up, bond issuers are compelled to issue new bonds with coupon rates closer to the new interest rate or at the same rate. The new bond's coupon rate might therefore, be better than my existing bond's coupon rate. Assuming the face value of the bond is 1000 dollars, an investor won't come to buy my existing bond from me which is trading in the secondary market. The investor will pick up the brand new bond with a better coupon rate. Thus, for me to be able to sell my bond, the price of my bond will have to go down - and this will be decided by the market dynamics. When the price of my bond goes down, the yield - which is the coupon payment divided by the bond price - will go up. Remember the coupon rate and face value are constant. Similarly, when bond price goes up in the secondary market when interest rate go down, the yield goes down. Thus over the tenure of the bond this game goes on and on ultimately averaging out at the end of the tenure of the bond. Yield is like the IRR which investors calculate to check the rate of yield which will ensure they get commensurate amount of money at least at the end of the tenure of the bond which will ensure a no profit no loss scenario for the investor. This is called Yield to Maturity or YTM.
Interest Rates and Bond prices are inversely related Why? If rates were to rise in the short term then having your money stuck in a bond for longer period would give lower yields so, people prefer short term parking over longer duration bond investing, so will lesser bond preferences, assuming lower bond yields, bond prices in the open market also come down and vice-versa if rates were to fall in the short term, then bond yields would effectively be more than their other alternative investments in the present and hence the demand for such bonds and thereby their prices in the open market under such conditions will rise.
I thought it was a good video and also brought into play laddering fixed income aswell as diversifying across types of fixed income, credit qualities, and time horizons. Although I can see why inverted yield curves do not always mean recession may be coming forth due to the fact that if interest rates are 10% right now, that is because a country is already in a recessionary environment asking for capital, and in the future if they go down to 5%, that generally means a country is less desperate for money, and thus in a healthier position... be nice to have replies.
I'm REALLY disappointed that you deleted the TD Ameritrade videos. They were really good. Please bring them back. The TD Ameritrade brand still exists, so why not keep them? You should at least keep them until you make a replacement with the Schwab theme.. but honestly, I think you should keep both and have them explain the same concept slightly differently.
We understand that they were well liked so we converted many of them to Charles Schwab branding. Please look over the multiple videos already on the site , you might find many of the video you thought were lost. ^BC
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Still never said why interest rates affect the bond yield.
Interest rates and bond yield have a negative correlation.. if a bond was issued at 2% interest rate and the interest rate goes up to 3%, the bond yield goes down since it’s less attractive now investment now, I could earn more interest in my savings account than holding onto the bond.. if the interest rate decreases to 1%, that same bond is more attractive now, so the bond yield will increase
@@SlicedMango17 that's half the story... bonds on the secondary market follow interest rates (to a degree)
Very simple. When interest rate goes up, bond issuers are compelled to issue new bonds with coupon rates closer to the new interest rate or at the same rate. The new bond's coupon rate might therefore, be better than my existing bond's coupon rate. Assuming the face value of the bond is 1000 dollars, an investor won't come to buy my existing bond from me which is trading in the secondary market. The investor will pick up the brand new bond with a better coupon rate. Thus, for me to be able to sell my bond, the price of my bond will have to go down - and this will be decided by the market dynamics. When the price of my bond goes down, the yield - which is the coupon payment divided by the bond price - will go up. Remember the coupon rate and face value are constant. Similarly, when bond price goes up in the secondary market when interest rate go down, the yield goes down. Thus over the tenure of the bond this game goes on and on ultimately averaging out at the end of the tenure of the bond. Yield is like the IRR which investors calculate to check the rate of yield which will ensure they get commensurate amount of money at least at the end of the tenure of the bond which will ensure a no profit no loss scenario for the investor. This is called Yield to Maturity or YTM.
Interest Rates and Bond prices are inversely related Why?
If rates were to rise in the short term then having your money stuck in a bond for longer period would give lower yields so, people prefer short term parking over longer duration bond investing, so will lesser bond preferences, assuming lower bond yields, bond prices in the open market also come down
and vice-versa if rates were to fall in the short term, then bond yields would effectively be more than their other alternative investments in the present and hence the demand for such bonds and thereby their prices in the open market under such conditions will rise.
Thanks a bunch
I thought it was a good video and also brought into play laddering fixed income aswell as diversifying across types of fixed income, credit qualities, and time horizons. Although I can see why inverted yield curves do not always mean recession may be coming forth due to the fact that if interest rates are 10% right now, that is because a country is already in a recessionary environment asking for capital, and in the future if they go down to 5%, that generally means a country is less desperate for money, and thus in a healthier position... be nice to have replies.
I'm REALLY disappointed that you deleted the TD Ameritrade videos. They were really good. Please bring them back.
The TD Ameritrade brand still exists, so why not keep them? You should at least keep them until you make a replacement with the Schwab theme.. but honestly, I think you should keep both and have them explain the same concept slightly differently.
We understand that they were well liked so we converted many of them to Charles Schwab branding. Please look over the multiple videos already on the site , you might find many of the video you thought were lost. ^BC
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