Bonds

[danhoyda 10]

I'm having trouble understanding bonds.

 

When interest rates go up, newly issued bonds have a higher interest rate per coupon payment so previously issued bonds which have a lower interest rate than the new bonds issued therefore they are less valuable to the market. The old bonds prices to market should go down.

 

The inverse would be true if interest rates go up. (ie bond traded prices go down interest rates are higher).

 

The bonds fluctuate on the market because they are traded. So wouldn't they be a gague for what interest rates actually are based on what the price of a bond, that is traded on the market at any given time? But the prices fluctuate alot. So if prices of bonds change alot then interest rates are always changing?! What does the fed mean when they are increasing or decreasing rates?

 

How does one differentiate between a bond traded on the market with a coupon rate of 5% compared to another bond traded at 10%? Are all bonds traded on the treasury market a given rate? How could they be? Because there are bonds issued every 2, 5, 10 and 30 years.

 

I guess my question is, When watching bond prices, how does one know what the coupon payment is when they buy one on the market?

[TheNegotiator 13]

Which bonds are you looking at? Govt bond futures for example, are a basket of issues. The rate is determined by the price and the coupon. Like recently in Europe, they have been saying how the governments' costs of borrowing were going up and up. The coupon didn't change, nor did the nominal value of the bond. But as risk in this example goes up, the market auctions lower to entice buyers. So the price they sell their bonds for goes down. e.g. a Eur100,000 bond with a 5% coupon will pay 5% per year then Eur100,000 at maturity, but it might sell for lower or higher than the nominal Eur100,000 value depending on demand. If it's lower, the 5% goes up and if it's higher, 5% rate effectively lowers.

 

Typically if you are going to trade bonds you wouldn't need to get too technical imo. You need to know the effect interest rate changes effect prices, inflation, geopolitical events and curve changes. It depends what your requirements are though.