I shared this thread on the other app bc it’s very important to understand the basics of bonds to understand what happened this weekend, and to understand what happens in the financial system in general. If you don’t understand these basics then you’re missing out.
What are Bonds?
Think about bonds as “fixed income.” You literally loan money to the government to receive a fixed amount of income every year.
So if you loan $100 to the govt at a yield (coupon rate) of 10% then what’s fixed (the coupon) is the $10 a year that the govt pays you. That’s a fixed stream, every year the govt is paying you $10.
Now if the “free” market decides that 10% is too high, and you want to sell your bond in an auction let’s say you can sell your bond for $110 now. Well the stream of $10 a year remains fixed (coupon), but the YIELD (coupon rate) has now gone down. Bc $10 from $110 is less than the original 10%. Price of the bond went up, the coupon rate went down.
And if less ppl want your bond then you’d sell it for a loss for say $90. And the coupon rate would go up.
The coupon rate normally has to do with how creditworthy (trustworthy) the market perceives you.
Higher coupon rates are cheaper bonds (as we discussed), so 3rd world countries normally have cheap bonds with high coupon rates bc there’s a higher risk involved for the lender.
1st world countries normally have expensive bonds with lower coupon rates bc they are perceived as creditworthy.
Risk is a big factor as rates rise.
I hope this helps you get started in understanding bonds if you’ve been wondering how they work. Obviously this is a very small definition but a great place to get started. Hope you enjoyed 🤙
BigSeanHarris / Sean Harris🏀
npub135…v5xpr
2023-03-14 11:51:08
Author Public Key
npub135x4y8w7jty24ggvxfm0c4mqaknk2su0fzzmwrgfdfylj6tz3l9qlv5xprPublished at
2023-03-14 11:51:08Event JSON
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"content": "I shared this thread on the other app bc it’s very important to understand the basics of bonds to understand what happened this weekend, and to understand what happens in the financial system in general. If you don’t understand these basics then you’re missing out.\n\nWhat are Bonds?\n\nThink about bonds as “fixed income.” You literally loan money to the government to receive a fixed amount of income every year.\n\nSo if you loan $100 to the govt at a yield (coupon rate) of 10% then what’s fixed (the coupon) is the $10 a year that the govt pays you. That’s a fixed stream, every year the govt is paying you $10.\n\nNow if the “free” market decides that 10% is too high, and you want to sell your bond in an auction let’s say you can sell your bond for $110 now. Well the stream of $10 a year remains fixed (coupon), but the YIELD (coupon rate) has now gone down. Bc $10 from $110 is less than the original 10%. Price of the bond went up, the coupon rate went down.\n\nAnd if less ppl want your bond then you’d sell it for a loss for say $90. And the coupon rate would go up.\n\nThe coupon rate normally has to do with how creditworthy (trustworthy) the market perceives you. \n\nHigher coupon rates are cheaper bonds (as we discussed), so 3rd world countries normally have cheap bonds with high coupon rates bc there’s a higher risk involved for the lender.\n\n1st world countries normally have expensive bonds with lower coupon rates bc they are perceived as creditworthy.\n\nRisk is a big factor as rates rise.\n\nI hope this helps you get started in understanding bonds if you’ve been wondering how they work. Obviously this is a very small definition but a great place to get started. Hope you enjoyed 🤙",
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