You have a gift for explaining complicated things in a simple to understand manner. I sincerely appreciate your matter of fact, simple explanations. A truly heart felt appreciation from me to you. Many thanks.
For clarity on the $1418 figure: If A holds a 5% bond of $1000 face value - at the end of 30 years ( maturity period) he would make $1500 ($50 x 30) in interest bringing the total to $2500 ($1000 + $1500). Now interest rate drops to 2.83%. Mr. B is looking to invest in bonds. If B want to make $2500 at the end of 30 years (at 2.83%) he would have to invest $1418 today instead of $1000 (as Mr. A did). So Mr. A can sell his bond for anywhere between $1000 - $1418 to Mr. B.
I know it's been a year later and technicalities might not matter, but I did calculations based on what you said and my results didn't match $1418. I must've did something wrong. Bond A Details - 5% interest - $1000 face value - 30 years maturity period Return = $2500 30 years x ($1000 x 0.05) + $1000 = $2500 Bond B Details - 2.83% interest - ?? face value - 30 years maturity period Problem: find "face value" from the details of Bond B let f be face value 30 x (0.0283f) + f = $2500 0.849f + f = $2500 1.849f = $2500 f = $2500 / 1.849 f = $1352 Where did that extra $66 ($1418 - $1352) come from? Is that like a mark up or something?
@@chrisrabe Hey its 30 year maturity for A, but for B, which buys them 2 years later, have only 28 years to wait for maturity for its 28 * (0.0283f) + f = 2500 0.7924f + f = 2500 1.7924f = 2500 f = 2500 / 1.7924 f = 1394.77 for some reason, they calculated that for 27 years and not 28, or im missing a year somewhere
Thank you very much Preston Pysh for taking the time and effort in putting together all this content. It is unparalleled on youtube, being very clear and comprehensive. I am lucky to have discovered your content now, more than 7 years after its original release. 7 years, wow.
In the history of watching youtube videos for approximately 7 years consistently. I claim this video to be the best explainotary video on the internet. I am an engineer, so I watched about 7 thousand educating videos, so I know what I am talking about.
Thank you, Preston. Those confused about how he arrived at $1418 bond value, please use excel spreadsheet to understand the valuation 1. In the first column write numbers 1-56 (pending semi-annual life term of the bond / 28 years *2 = 56) 2. In the second column, write the semi-annual coupon value i.e $25 (@5%) besides number 1-55 and besides line 56 write $1025 since you will get your initial investment of $1000 back due to bond maturity... 3. Third column, you need to calculate the present value interest factor. Since the semi-annual interest rate is .01415 (annual interest rate of.0283/2), you can calculate the present value interest factor by using the excel formula =(1+.01415)^t (here t is the corresponding time mentioned in the first column. 4. In column 4, you just need to divide column 2 by column 3 and then add the values in column 4, you should get $1417.684026
this is exactly what I was looking for!! omg it took me years just wondering about bonds and you cleared up my doubts in 15 minutes, you do have a gift! I just watched other tutorials but all of them left me still wondering, I love this!! thank you so much!!!
Thank You so very much for empowering us with knowledge. give a man a fish he will eat for a day teach a man how to eat he will eat for a life time. Very greatfull for teaching us and you are a fantastic teacher. Thank You.
Preston, you are a lifesaver. Investing has always been a confusing topic for me but with your help, I am finally understanding. Please keep up the great work? How can I show some support to your page?
Thank you Preston you are amazing! Great explanation and easy to understand, although I still need to figure out how the $1418 came out but I will keep watching all the videos and they really helped me a lot. Thank you for making them!
Thank you so much. I wished this was part of the school curriculum. You really have a great way of explaining this. I came across you by chance because the UK government got into a terrible financial crisis which I wanted to understand fully. Got this in one, you are a brilliant teacher. Fantastic value ! I subscribed and hope you keep going 👍
Thank you for this masterful explanation! What do I do now when interest rates are very low and stock prices are high? Do I buy bonds in case interest rates go negative, search for undervalued stocks, switch to an entirely different asset class or wait for a more favorable investing environment? If the answer is to wait, then what form should my capital take?
+Dina Sallam Heyy, I'm no expert so don't quote me on this. I realise the reply is a little late, but it may be helpful to others (if correct) [if I get this wrong, someone please correct me]. A simple formula for bond price is: ((C/r) * (1- 1/([1+r]^t))) + p/([1+r]^t) Where: C = coupon paid (semi-annual) r = interest rate (semi-annual) t = time (semi-annual) p = par value ~ a quick google of this will lay it out in a much nicer way than I have :) In the above example we want to use the existing elements of the bond, with the new interest rate, to determine what the price of the bond will be. C = 5% coupon rate * 1000 par value / 2 since we want the semi-annual amount, which is 25. r = 0.0283 / 2 = 0.01415 t = originally would have bbeen 30 * 2 = 60, however we're looking at it 2 years later, so it's 28 * 2 = 56 p = 1000 still ~ then we put the values into the formula (may get messy here): ((25/0.01415) * (1-1/[1.01415]^56)) + 1000/[1.01415]^56 = (1766.78 * 0.5447) + 455.278 = 962.367 + 455.278 = 1417.6454 (with small rounding errors) ~Great video Preston Pysh :)
Hey Preston, Im an ardent watcher of your incredible videos. I wanted to get some clarification on something you said about risk associated with bonds. point 2 states that interest rates change, however you only list the positive of it i.e. if you buy bond at 5% interest and a year later its 4%, you are still at an advantage - would the risk then be if you buy bond at 5% interest and then a year later its at 6%- so you'd be at a disadvantage? Thats my guess and what would seem logical, but would be super grateful if you can clarify. Once again, your videos have been such a pleasure watching!
@Jing Li disadvantaged if ur plan was to sell it alomg the way and get out of it and just be happy u got some interest and now wanna free up ur money again. You still are winning if u hold it till maturity becuase u still gettin ur 5% all the way till it matures n u given ur $1000 back. Lemme kmow if this is all correct as i am just learning all this stuff. Thanks
@17:30 you state that the value of the bond would approximately change from $1000 to $1418. Can you give greater clarity on how that value increase is determined? Thank you.
I had the same question and posted the below info in a comment. I just thought I would copy and paste it here. "So I had a question concerning the increase in the value of the bond from $1000 to $1,418. Is it due to the fact that a 5% coupon rate yields 1400 (28 years) + the original 1000 while the 2.83% yields 849 (30 years) + the original 1000 So 1,418 for a 5% bond with 28 years left = 2400 - 1,418 for bond = 982 / 1418 investment = 69 percent return on the $1418 investment over 28 years which has an average 2.47% yield per year While 1000 for a 2.83% bond with 30 years = 1,849 - 1000 for bond = 849 / 1000 for bond = 84.9 percent return on the $1000 investment over 30 years which has an average 2.83% yield per year Both investments don't make sense to me since taxes (unless IRA or 401K) and inflation would make the investment worthless. So wouldn't someone investing in bonds be banking on the interest rates flipping quickly in a short amount of time and then selling an overpriced bond that would yield less than current bonds? So is the idea to sell the bond before it matures at a price that will yield a much better average return the length of time you have held the bond?"
So it is basically like a term investment (except you can sell the bond at any time??) with the bank. But the bond is held with a business/government and not directly the bank.
@Preston when I buy a 10 year bond at a given date and interest rate is 2% at that point. Do I get the whole 10years that 2 % ( is it fix ) or does it change when interest rate change?
Mr Preston, Thanks fot your good job. I have a question. As the bank hasn't yet sold the bonds but was willing to facilitate the loan, from what source does the bank collect the Money to facilitate the loan?
in the risks of bonds, you didn't discuss liquidity. My guess is you can sell a bond at any time, but what happens it you sell it or need to liquidate it before it matures? you just get whatever it is trading at?
It seems to me the most important lesson is to always be on the right side of the equation..as you say, when the yield of the market is less than the yield of bonds thats when you want to be in bonds. Currently the market is yielding more than bonds so to be in bonds right now doesnt make sense. Or maybe especially right now given the uncertainty of QE
What I'd like to know is where the $1,418 bond price came from. I mean, it should only depend on how much someone would be willing to pay for it, right? So it might be that or it might be any other amount higher than 1,000, is that correct?
looking for clarification here. You said as bond prices go up typically stock prices go down and vice versa. but as the stock prices go up the bond yields go up, correct?
Question for you Preston Pysh. If your return on a 30 year bond is 5% on face value 1000 dollars that amounts to 50 dollars a year for 30 years so 1500 dollars + 1000 dollars at maturity. If you had bought a stock for 1000 that had a return of 3.7% and held it for 30 years the return would have compounded and you would now have 1000*1.037^30 = 2974 dollars approximately. In this case isn't a stock more profitable than the return on the bond? Thank you for all your awesome videos
Of course any asset on which interest is compounded is miles ahead of simple interest assets... it is just that bonds assure you more safety than a stock which has the potential to go bankrupt ( unless you bought some good ones) and stocks are also subject to volatility and market crashes which most investors can't handle...
Hello Preston, I'm studying macro atm and I'm just a bit curious about bonds. If I eg. purchase a bond before the interest rate goes down, the value of the bond increase. Does it affect my bond as well if choose to keep it? Or only for people that actually sell their bonds to the market (for a higher value)?
First of all thanks for the amazing videos. Now one question. in 2017 we have overvalued stocks and low interest bonds. What is the value investing approach in this scenario?
So I bought some bond back in 2005 for my kids. Some of them I cash it out after a year. The rest I keep moving places to place I lost all off them. How can I claim them
I have a question. even though a longer average maturity increases the risk of a volatility, doesn't it also mean a greater return? 5% paid out for 30 years you'd make more than 5% for 10 years? just a bit confused there.
Does compounding happens in the case of bond. 1 Bond rate = $ 1000 and 5% coupon Rate. At the end of year 1 it will be $1050. But my Question is.. In the 2nd year will the return of 5% coupon rate be on that $1050 value or the initial amount invested ($1000).
Hi Preston! Loving your tutorials. I would appreciate if you could tell me how did you figure out the interest rates of bonds,p/e value and dividend yeild of the stocks just by looking at that graph? I was unable to calculate the same thing just by looking at the graph. Thanks :)
Sidharth Nayyar 7 months ago For clarity on the $1418 figure: If A holds a 5% bond of $1000 face value - at the end of 30 years ( maturity period) he would make $1500 ($50 x 30) in interest bringing the total to $2500 ($1000 + $1500). Now interest rate drops to 2.83%. Mr. B is looking to invest in bonds. If B want to make $2500 at the end of 30 years (at 2.83%) he would have to invest $1418 today instead of $1000 (as Mr. A did). So Mr. A can sell his bond for anywhere between $1000 - $1418 to Mr. B.
This was really great. It would help to break down the math of the last scenario tho. I don’t get how the $1,000 bond gained value to $1,418/$1,518 in two years.
That was a very quick response, thanks for that, understand your comments. What I dont understand however is how did you calculates that the bond 5% coupon bond was worth $1418 when the current federal rate was 2.83% ? PS - Your book is great, hope it does fantastically well ...
thanks, great video! but i am kind of confused where you came up with the bond being worth $1418. so someone pays you 1418 for that bond, but only receives 5% of the $1000? therefore losing $318?
Hey Preston, What is your current (2018) Opinion on looking for bonds? The SandP 500's PE ratio is pretty ridiculous. Based on your video, it would seem to look for Bonds today, but because the FED Funds rate is so low close to the 1 to 2 % interest (and no room to fall back to decrease interest for the restimulation of the economy), I would be very scared of the ever increasing FEDS Funds rate AFTER I pay for the then better yielding bond.
when you compare return on djia with the help of pe ratio vs govt bond yield we know which one is a better investment but what happens when DJIA return is 4.1% 30 year govt bond yield is 3.13% ( so stock is still a better choice) but DJIA div yield is 2.19%...does major index divend yield plays a role in choosing which one should be a better investment? or how bigger role major index div yield plays in terms of selecting which side one should be? many thanks.
i know you probably had this question many times but how did the bond increase it's worth to 1418 dollars? It would be great if you could show us the solution for this. Thanks in advance and God bless. Really loving your tutorial and I'm slowly being educated and transformed into a financially savvy person.. Thank you very much..
At 6:47 The bank sells bonds to investors, but there's nothing said about whats the bank's interest? Just lending 500M and receiving bonds worth 500M and selling bonds at same price?
I think your videos are great and you explanation fantastic - keeping it simple however I am now confused, if you have a $1000 bond @ 5% = $50, however at a rate of 2.83% the value of the bond would need to be $1766; $1766 @ 2.83% = $50; therefore the bond is worth $1766 plus $50 + $50 = $1866 in 2 years. Obviously my thinking is flawed but where, can you help?
Hi Preston You have an amazing collection of highly informative videos. Kudos for your effort! I have a question regarding bond I've been pondering lately: Suppose the stock market is high and not worth investing AND the interest rates are low/moderate i.e. expected to go up a little; then where to invest ? Stocks are too risky, long term bonds may fail to generate good returns if interest rates go up. Is money market (short term debt) good investment in those times ? I am asking it as a defensive investor who likes to dig investments but not deep enough to find quality stocks (relative to debt market return) when stocks are actually trading high (say pe > 22). Thanks Nikhil
orestesdd ***** If you take a look at Ray Dalio's all weather portfolio, It seems like commodities and gold is a good place to park the cash right now. But that is completely different from Warren Buffet's philosophy. What do you guys think?
1 more question- how are you getting to the $1418 value at the end of the video, is that just an arbitrary market price based on what people are willing to buy it for, or is it specifically based on the yield % (e.g. 5% is 43% higher than 2.83, therfore the par value is approx 43% higher @ $1,430 than the $1,000 par priceyou pad before?)
Great video.. but just one thing! Federal government bonds are not 0% risk. Although they can print more money, I believe they could still default or hyper-inflate to the point their money isn't worth as much as initially invested. I'm sure you understand this, but it's just a point I wanted to make for the audience.
Any explanation on what's happening presently in the market? 30 year treasury bonds are @ an all time low, stock prices/ PE ratio's, all time high. Neither @ the moment seems like a good return on investment? Any advise anyone?
Thanks! How did you calculate a $1,000.00 bond at a 5% return to have a value of $1,418.00 (not including the $100.00 return) after 2 years? Your response to Dina Sallams, in which you answered this question, is no longer in the comments section. Thank you for your help and patience.
wow that just blew my mind.... not sure I follow but that was important. So are you saying that if you had bought a bond at $1000 par and 5% coupon, and then the market changed such that bond coupons were only 2.83%, your bond would be adjusted to a par balue of $766 and a coupon of 2.83% as well? I am sure that can't be true, how am I misunderstanding? that example I just gave, the market would basically be punishing the savvy investor.
I was told to spread my money across different things like stocks and bonds to protect my $750k retirement savings. Now, with the markets being shaky, should I keep adding money to my portfolio or consider other options?
So what do you do when stocks are at an all time high and interest rates are low like today? Has there been a period in history when we had the same situation?
![Digital Circus Episode 4 [TRAILER]](http://i.ytimg.com/vi/abZtsmMUbJo/mqdefault.jpg)
You have a gift for explaining complicated things in a simple to understand manner. I sincerely appreciate your matter of fact, simple explanations. A truly heart felt appreciation from me to you. Many thanks.
***** I am doing my IMC exam and your information is so easy to understand. Amazing
+Preston Pysh better than my professor lol
Lak lak thora
So very true 🙏🏻👍🏻
Great comment and very true. I'm really enjoying these videos.
For clarity on the $1418 figure:
If A holds a 5% bond of $1000 face value - at the end of 30 years ( maturity period) he would make $1500 ($50 x 30) in interest bringing the total to $2500 ($1000 + $1500). Now interest rate drops to 2.83%. Mr. B is looking to invest in bonds. If B want to make $2500 at the end of 30 years (at 2.83%) he would have to invest $1418 today instead of $1000 (as Mr. A did). So Mr. A can sell his bond for anywhere between $1000 - $1418 to Mr. B.
I know it's been a year later and technicalities might not matter, but I did calculations based on what you said and my results didn't match $1418. I must've did something wrong.
Bond A Details
- 5% interest
- $1000 face value
- 30 years maturity period
Return = $2500
30 years x ($1000 x 0.05) + $1000 = $2500
Bond B Details
- 2.83% interest
- ?? face value
- 30 years maturity period
Problem: find "face value" from the details of Bond B
let f be face value
30 x (0.0283f) + f = $2500
0.849f + f = $2500
1.849f = $2500
f = $2500 / 1.849
f = $1352
Where did that extra $66 ($1418 - $1352) come from? Is that like a mark up or something?
@@chrisrabe Hey
its 30 year maturity for A,
but for B, which buys them 2 years later, have only 28 years to wait for maturity
for its 28 * (0.0283f) + f = 2500
0.7924f + f = 2500
1.7924f = 2500
f = 2500 / 1.7924
f = 1394.77
for some reason, they calculated that for 27 years and not 28, or im missing a year somewhere
@@mikereznikov5521 he added the 2 years of getting the bond coupons
Sidharth Nayyar thank you
but im still so confused that why is the 5% bond worth $1418. 0.0
Wow, this is jaw dropping. No one ever came close to even showing me a tenth of this. Thank you Preston!
***** Genius
After all these years, now I know what a bond is. Thank you for such a good, concise explanation!
cannot agree more haha
Same here 🎉😂
Thank you very much Preston Pysh for taking the time and effort in putting together all this content. It is unparalleled on youtube, being very clear and comprehensive. I am lucky to have discovered your content now, more than 7 years after its original release. 7 years, wow.
In the history of watching youtube videos for approximately 7 years consistently. I claim this video to be the best explainotary video on the internet. I am an engineer, so I watched about 7 thousand educating videos, so I know what I am talking about.
Thank you, Preston.
Those confused about how he arrived at $1418 bond value, please use excel spreadsheet to understand the valuation
1. In the first column write numbers 1-56 (pending semi-annual life term of the bond / 28 years *2 = 56)
2. In the second column, write the semi-annual coupon value i.e $25 (@5%) besides number 1-55 and besides line 56 write $1025 since you will get your initial investment of $1000 back due to bond maturity...
3. Third column, you need to calculate the present value interest factor. Since the semi-annual interest rate is .01415 (annual interest rate of.0283/2), you can calculate the present value interest factor by using the excel formula =(1+.01415)^t (here t is the corresponding time mentioned in the first column.
4. In column 4, you just need to divide column 2 by column 3 and then add the values in column 4, you should get $1417.684026
this is exactly what I was looking for!! omg it took me years just wondering about bonds and you cleared up my doubts in 15 minutes, you do have a gift! I just watched other tutorials but all of them left me still wondering, I love this!! thank you so much!!!
You are doing an extraordinary service to all of humanity. May you have a long and happy life
Thank you, i finally understand bond mannn, i cant find a good explanation anywhere as good and clear as you are!
This presentation is the best on Bonds I have watched. Its truly been well explained
Thank You so very much for empowering us with knowledge. give a man a fish he will eat for a day teach a man how to eat he will eat for a life time. Very greatfull for teaching us and you are a fantastic teacher. Thank You.
Finally, someone who knows how to explain the complete context of what a bond is without diving into calculations immediately.
I wish I could buy you a drink Mr. Preston, you are Gods gift, thank you ever so much for the knowledge you are passing on to us. God Bless you
Preston, you are a lifesaver. Investing has always been a confusing topic for me but with your help, I am finally understanding. Please keep up the great work? How can I show some support to your page?
Go away you spamming troll
Absolutely amazing the way you explained bonds! It could not get better. You are certainly gifted!
OK after so many videos I watched on bonds, I finally get a clearer picture of why investors buy bonds. (appreciation + coupon)
You are better than any professor Ive ever had. Im majoring in this stuff and you are a tremendous help. Thank you so much.
We need more people in the world like preston psych! These videos are totally awesome
Thank you Preston you are amazing! Great explanation and easy to understand, although I still need to figure out how the $1418 came out but I will keep watching all the videos and they really helped me a lot. Thank you for making them!
You explained this way better than my college textbook did. Thank you!
Thank you so much. I wished this was part of the school curriculum. You really have a great way of explaining this. I came across you by chance because the UK government got into a terrible financial crisis which I wanted to understand fully. Got this in one, you are a brilliant teacher. Fantastic value ! I subscribed and hope you keep going 👍
Thank you for this masterful explanation! What do I do now when interest rates are very low and stock prices are high? Do I buy bonds in case interest rates go negative, search for undervalued stocks, switch to an entirely different asset class or wait for a more favorable investing environment? If the answer is to wait, then what form should my capital take?
You did such an excellent job explaining this concept. It was so easy to follow and the visual effects really provided so much clarity.
Thank you, in 17:22, i just need to know how do you get the price of 5% bond to be 1418. what is the calculations behind that?, Thanks
+Dina Sallam Heyy, I'm no expert so don't quote me on this. I realise the reply is a little late, but it may be helpful to others (if correct) [if I get this wrong, someone please correct me].
A simple formula for bond price is:
((C/r) * (1- 1/([1+r]^t))) + p/([1+r]^t)
Where:
C = coupon paid (semi-annual)
r = interest rate (semi-annual)
t = time (semi-annual)
p = par value
~ a quick google of this will lay it out in a much nicer way than I have :)
In the above example we want to use the existing elements of the bond, with the new interest rate, to determine what the price of the bond will be.
C = 5% coupon rate * 1000 par value / 2 since we want the semi-annual amount, which is 25.
r = 0.0283 / 2 = 0.01415
t = originally would have bbeen 30 * 2 = 60, however we're looking at it 2 years later, so it's 28 * 2 = 56
p = 1000 still
~ then we put the values into the formula (may get messy here):
((25/0.01415) * (1-1/[1.01415]^56)) + 1000/[1.01415]^56 =
(1766.78 * 0.5447) + 455.278 =
962.367 + 455.278 = 1417.6454 (with small rounding errors)
~Great video Preston Pysh :)
thank you!!!!
Joshua Holt the t=56 doesnt make sense
Jeauku 30 (30 years maturity) -2 (2 years later) = 28
Then 28*2 = 56
wallah I got the same question
Amazing explanation in this video. This is first time I truly understood the concept of bond
It is amazing how can we find great and helpful content for free nowadays
Hey Preston, Im an ardent watcher of your incredible videos. I wanted to get some clarification on something you said about risk associated with bonds. point 2 states that interest rates change, however you only list the positive of it i.e. if you buy bond at 5% interest and a year later its 4%, you are still at an advantage - would the risk then be if you buy bond at 5% interest and then a year later its at 6%- so you'd be at a disadvantage? Thats my guess and what would seem logical, but would be super grateful if you can clarify. Once again, your videos have been such a pleasure watching!
@Jing Li disadvantaged if ur plan was to sell it alomg the way and get out of it and just be happy u got some interest and now wanna free up ur money again. You still are winning if u hold it till maturity becuase u still gettin ur 5% all the way till it matures n u given ur $1000 back. Lemme kmow if this is all correct as i am just learning all this stuff. Thanks
@17:30 you state that the value of the bond would approximately change from $1000 to $1418. Can you give greater clarity on how that value increase is determined? Thank you.
good question- i too wonder how thats determined.
Simple Man Style
An example to clarify would be appreciated.
I had the same question and posted the below info in a comment. I just thought I would copy and paste it here.
"So I had a question concerning the increase in the value of the bond from $1000 to $1,418.
Is it due to the fact that a 5% coupon rate yields 1400 (28 years) + the original 1000 while the 2.83% yields 849 (30 years) + the original 1000
So 1,418 for a 5% bond with 28 years left = 2400 - 1,418 for bond = 982 / 1418 investment = 69 percent return on the $1418 investment over 28 years which has an average 2.47% yield per year
While 1000 for a 2.83% bond with 30 years = 1,849 - 1000 for bond = 849 / 1000 for bond = 84.9 percent return on the $1000 investment over 30 years which has an average 2.83% yield per year
Both investments don't make sense to me since taxes (unless IRA or 401K) and inflation would make the investment worthless. So wouldn't someone investing in bonds be banking on the interest rates flipping quickly in a short amount of time and then selling an overpriced bond that would yield less than current bonds?
So is the idea to sell the bond before it matures at a price that will yield a much better average return the length of time you have held the bond?"
skillets Less profit on the same agreed interest.
So it is basically like a term investment (except you can sell the bond at any time??) with the bank. But the bond is held with a business/government and not directly the bank.
@Preston when I buy a 10 year bond at a given date and interest rate is 2% at that point. Do I get the whole 10years that 2 % ( is it fix ) or does it change when interest rate change?
Mr Preston, Thanks fot your good job. I have a question. As the bank hasn't yet sold the bonds but was willing to facilitate the loan, from what source does the bank collect the Money to facilitate the loan?
in the risks of bonds, you didn't discuss liquidity. My guess is you can sell a bond at any time, but what happens it you sell it or need to liquidate it before it matures? you just get whatever it is trading at?
I've learned so much from your videos. You can seriously charge for this
It seems to me the most important lesson is to always be on the right side of the equation..as you say, when the yield of the market is less than the yield of bonds thats when you want to be in bonds. Currently the market is yielding more than bonds so to be in bonds right now doesnt make sense. Or maybe especially right now given the uncertainty of QE
thanks this is awesome explanation can you also introduce what is yield vs bond ?
Hi Mr.Pysh, when the stock rises to 6.7% do we also have to consider inflations rate same as when investing bonds ?
Thanks you so much, Preston! I had to write a report on the debt structure of Denver International Airport and had no idea what a bond was, haha.
Thanks for the video! But I'm very confused with 17:55. How did you arrive to those numbers? Thanks! :)
What I'd like to know is where the $1,418 bond price came from. I mean, it should only depend on how much someone would be willing to pay for it, right? So it might be that or it might be any other amount higher than 1,000, is that correct?
looking for clarification here. You said as bond prices go up typically stock prices go down and vice versa. but as the stock prices go up the bond yields go up, correct?
Question for you Preston Pysh. If your return on a 30 year bond is 5% on face value 1000 dollars that amounts to 50 dollars a year for 30 years so 1500 dollars + 1000 dollars at maturity. If you had bought a stock for 1000 that had a return of 3.7% and held it for 30 years the return would have compounded and you would now have 1000*1.037^30 = 2974 dollars approximately. In this case isn't a stock more profitable than the return on the bond? Thank you for all your awesome videos
Of course any asset on which interest is compounded is miles ahead of simple interest assets... it is just that bonds assure you more safety than a stock which has the potential to go bankrupt ( unless you bought some good ones) and stocks are also subject to volatility and market crashes which most investors can't handle...
Hey preston thanks for such lovely information !!
Please tell me how u calculated value of the bond from $1000 to $1,418 ?
Hello Preston,
I'm studying macro atm and I'm just a bit curious about bonds. If I eg. purchase a bond before the interest rate goes down, the value of the bond increase. Does it affect my bond as well if choose to keep it? Or only for people that actually sell their bonds to the market (for a higher value)?
sir we have a bond from my grandfather,, we do not know how to use this, and where to exchange.. can u give me info. or answer? thank u.
First of all thanks for the amazing videos. Now one question. in 2017 we have overvalued stocks and low interest bonds. What is the value investing approach in this scenario?
So I bought some bond back in 2005 for my kids. Some of them I cash it out after a year. The rest I keep moving places to place I lost all off them. How can I claim them
Preston, congratulations for the amazing job
for help so many people around
and thank you very much
You are the best. Glad I found you.
at 17:50, "therefore the price of 5% bond is now worth: $1,418 ". Could you explain, please, how did you calculate that? thanks
Yestay Zeinollauly I can't physically copy and paste my original comment right now, but find my reply to Dina Sallams comment - that'll Explain it! :)
at 17:05 so the 5% will be at a fixed rate compared when it drops to %2.83?
Very informative. Really enjoying it so far, 6 years on :)
I have a question. even though a longer average maturity increases the risk of a volatility, doesn't it also mean a greater return? 5% paid out for 30 years you'd make more than 5% for 10 years? just a bit confused there.
Does compounding happens in the case of bond.
1 Bond rate = $ 1000 and 5% coupon Rate. At the end of year 1 it will be $1050.
But my Question is.. In the 2nd year will the return of 5% coupon rate be on that $1050 value or the initial amount invested ($1000).
No compounding doesn't happen in the case of bonds.. the coupon rate is applied on the original investment and not on the interest earned every year!
Hi Preston! Loving your tutorials. I would appreciate if you could tell me how did you figure out the interest rates of bonds,p/e value and dividend yeild of the stocks just by looking at that graph? I was unable to calculate the same thing just by looking at the graph. Thanks :)
Question: when Jacks company makes the coupon payments, is he making the payment of 5% on the full 500,000 bonds? I was confused on that.
Jack is the kind of guy you just wanna kick back and chill with
at 17:35 time, how did you get the $1418 computation for the 5% bond?
Sidharth Nayyar
7 months ago
For clarity on the $1418 figure:
If A holds a 5% bond of $1000 face value - at the end of 30 years ( maturity period) he would make $1500 ($50 x 30) in interest bringing the total to $2500 ($1000 + $1500).
Now interest rate drops to 2.83%. Mr. B is looking to invest in bonds. If B want to make $2500 at the end of 30 years (at 2.83%) he would have to invest $1418 today instead of $1000 (as Mr. A did).
So Mr. A can sell his bond for anywhere between $1000 - $1418 to Mr. B.
@@DavidJohnson-dc8lu thanks for the explanation it helped a lot
At 15:34 I get a little bit confused... isn't it good for bonds when they drop interest rates & vice versa? Can someone explain please? :/
TTTT it's good if you're already holding a bond. if you're not, then its bad for you if you want to invest in bonds
This was really great. It would help to break down the math of the last scenario tho. I don’t get how the $1,000 bond gained value to $1,418/$1,518 in two years.
How do you calculate this on HP 10bII
That was a very quick response, thanks for that, understand your comments. What I dont understand however is how did you calculates that the bond 5% coupon bond was worth $1418 when the current federal rate was 2.83% ?
PS - Your book is great, hope it does fantastically well ...
thanks, great video! but i am kind of confused where you came up with the bond being worth $1418. so someone pays you 1418 for that bond, but only receives 5% of the $1000? therefore losing $318?
amazing video! was confusing about bond, but your video helped me out after all.
WOOOHOOO I GRADUATED UNIT 1!!!!!!!!!!!!!! ON TO UNIT 2 :) thank you sir Preston
how to invest in bonds in negative/zero interest rates environment.... go for high yield corporate bond?
As underwriter sells the bonds on higher prices so this is all the profit he is getting or the bank pays him with amount on selling bonds?
Hey Preston, What is your current (2018) Opinion on looking for bonds? The SandP 500's PE ratio is pretty ridiculous. Based on your video, it would seem to look for Bonds today, but because the FED Funds rate is so low close to the 1 to 2 % interest (and no room to fall back to decrease interest for the restimulation of the economy), I would be very scared of the ever increasing FEDS Funds rate AFTER I pay for the then better yielding bond.
when you compare return on djia with the help of pe ratio vs govt bond yield we know which one is a better investment but what happens when DJIA return is 4.1% 30 year govt bond yield is 3.13% ( so stock is still a better choice) but DJIA div yield is 2.19%...does major index divend yield plays a role in choosing which one should be a better investment? or how bigger role major index div yield plays in terms of selecting which side one should be? many thanks.
Hi Preston, i am awaiting your reply...your lessons has been a great help..this can bring some clarity to my confusion...please reply, thanks
is the coupon rate associated with interest rates?
One thing your example is missing is, in general, earnings are not stagnant, so a PE of 20 will not be a PE of 20 for the next 30 years.
15:42 - surely dropping the interest rates would increase the price of the bond because other new bonds' coupon rate would be lower?
Kiwi totally correct, but at that point in the video he's talking about which investment would be better once interest rates had dropped
:)
ah alright :)
Excellent video. Very insightful and good use of examples and analogies. What's the name of the instrumental at the start and at the end?
will this apply for all the countries?
Hey can I know how do you get an Average Industry PE ratio?
You are an amazing teacher!
What a superb job! I watched a few other videos and was so clueless still. Many do you have more??
What's the name of the instrumental?
i know you probably had this question many times but how did the bond increase it's worth to 1418 dollars? It would be great if you could show us the solution for this. Thanks in advance and God bless. Really loving your tutorial and I'm slowly being educated and transformed into a financially savvy person.. Thank you very much..
At 6:47 The bank sells bonds to investors, but there's nothing said about whats the bank's interest? Just lending 500M and receiving bonds worth 500M and selling bonds at same price?
4:10 under writers fee!
I think your videos are great and you explanation fantastic - keeping it simple however I am now confused, if you have a $1000 bond @ 5% = $50, however at a rate of 2.83% the value of the bond would need to be $1766; $1766 @ 2.83% = $50; therefore the bond is worth $1766 plus $50 + $50 = $1866 in 2 years. Obviously my thinking is flawed but where, can you help?
Thank you very much for this. I was confused when reading from the book and this cleared the basics up.
+Jonathan Leack what book? if you could let me know that would be great!
Hi Preston
You have an amazing collection of highly informative videos. Kudos for your effort!
I have a question regarding bond I've been pondering lately: Suppose the stock market is high and not worth investing AND the interest rates are low/moderate i.e. expected to go up a little; then where to invest ? Stocks are too risky, long term bonds may fail to generate good returns if interest rates go up. Is money market (short term debt) good investment in those times ?
I am asking it as a defensive investor who likes to dig investments but not deep enough to find quality stocks (relative to debt market return) when stocks are actually trading high (say pe > 22).
Thanks
Nikhil
Nikhil Vidhani I feel the same as you. I totally agree with your question: where I do park my cash (over $200K). Thanks.
orestesdd ***** If you take a look at Ray Dalio's all weather portfolio, It seems like commodities and gold is a good place to park the cash right now. But that is completely different from Warren Buffet's philosophy. What do you guys think?
+gosuguru why not indexing?
what do you mean by indexing?
put money on index funds like s&p 500 or nasdaq
1 more question- how are you getting to the $1418 value at the end of the video, is that just an arbitrary market price based on what people are willing to buy it for, or is it specifically based on the yield % (e.g. 5% is 43% higher than 2.83, therfore the par value is approx 43% higher @ $1,430 than the $1,000 par priceyou pad before?)
amazing video thank you so much for explaining this so well
Great video.. but just one thing! Federal government bonds are not 0% risk. Although they can print more money, I believe they could still default or hyper-inflate to the point their money isn't worth as much as initially invested. I'm sure you understand this, but it's just a point I wanted to make for the audience.
Great Channel to build your financial education!!
How did u calculate the 1418 dollars at the end of the Video?
any luck with that ?
Mark vw - find my reply to Dina Sallams comment :)
Any explanation on what's happening presently in the market? 30 year treasury bonds are @ an all time low, stock prices/ PE ratio's, all time high. Neither @ the moment seems like a good return on investment? Any advise anyone?
Great investing lessons. Keep them coming.
Thanks! How did you calculate a $1,000.00 bond at a 5% return to have a value of $1,418.00 (not including the $100.00 return) after 2 years? Your response to Dina Sallams, in which you answered this question, is no longer in the comments section. Thank you for your help and patience.
So with bonds the 50$ every year is the profit investors make 50x30=1500 and once maturity they get the $1000 back making the total =2500?
wow that just blew my mind.... not sure I follow but that was important. So are you saying that if you had bought a bond at $1000 par and 5% coupon, and then the market changed such that bond coupons were only 2.83%, your bond would be adjusted to a par balue of $766 and a coupon of 2.83% as well? I am sure that can't be true, how am I misunderstanding? that example I just gave, the market would basically be punishing the savvy investor.
Really want to know how to get the 1418? thx
hello i want to know if i undrestood something correctly, is the coupon rate = intrest rate ?
yes and interest has to be paid yearly or half yearly or monthly depending upon the deal...
Hi, why is the imterest each bondholder receivesmis 25$, if the amjual coupon rate is 50$??
The coupon is paid twice a year. In this case $50/2 = $25. So $25 paid twice a year = $50.
Preston God bless u and your family Many thanks
I was told to spread my money across different things like stocks and bonds to protect my $750k retirement savings. Now, with the markets being shaky, should I keep adding money to my portfolio or consider other options?
I find this video very easy to understand
So what do you do when stocks are at an all time high and interest rates are low like today? Has there been a period in history when we had the same situation?
Ah just 5 Months later and now we are headed towards a recession... All things that go up must come down