[VIDEO] Bond markets and interest rates explained
Everything you wanted to know about bond markets, and why interest rates affect them … in 90 seconds!
Bond markets explained - video content
What are bonds?
And how do interest rates affect them?
Normally when we think of a loan, we think of the bank lending us money.
But in the case of a bond, you are lending money to the government or a corporation.
In return, you get your bond, with a coupon. This is the percentage of interest you’ll get back on your loan.
For example, if you own a £100 bond, with a coupon of 5%, you’ll be paid £5 per year for owning the bond.
Plus, when that bond expires, you’ll get your £100 value back.
So what happens when interest rates change?
I bought this bond for £100 last year with a 4% coupon. Will you buy it for £100?
No way! Interest rates have gone up. I can get a £100 bond with a 6% coupon now. I’ll give you £80 for it.
So ...
If interest rates go up ....Bond prices will come down.
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1 comment
FrustratedTrader
Nice clear explanation – as ever, thanks Mark