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What Do I Need to Understand About Bond Market?
by Admin ·
First we must be clear that a bond is a debt, a company or country needs money and issues bonds, which hopes to raise funds by giving in exchange an interest rate which is the famous coupon. If the coupon is higher than what can be achieved market investors will look at who would be willing to pay more than the value in nominal bond mind is that if the bond is worth $ 1,000 investors willing to pay more than that which implies that the bond is sold at a premium. (Do not confuse this bonus with the bonds of the issues the Government has nothing to do).
Otherwise, if the coupon is lower than what you get in the market, then investors would not be so interested, so they need an incentive to buy in this case is a discount on the price. For example, if the bond is worth 1,000, then investors would be willing to buy it for 800, this is known as a discount bond.
Prices move inversely to interest rates, as expected if rates rise prices fall, which means may be able to buy bonds at a discount if there is an expectation that rise in the future or to sell premium if the bonds are not expected increases in interest rates.
The other important element here is another interest rate and is called the yield to maturity which is the annual fee is earned if the investor holds the bond for life. This rate is vital because it allows a bond compares with another, for example to compare Brazil’s bond due in 2027 with one of Venezuela with the same performance, coupon, see the yield to maturity or YTM, as known in the market.
2 bonds with the same maturity you will prefer the one whose YTM is greater, but remember that most YTM implies greater risk if the YTM is 6 Brazil 27% and Venezuela 27 is 12%, implies that Brazil risk is half that of Venezuela. However, the ability to take risk is everyone.
Ready, if we understand well these two concepts and we can enter the bond market, because as has been aware, the bonds are dependent on interest rates so I need to know in detail, are the policies of issuers and countries where bonds are traded in order to understand where they are going the bonds.
Following are some examples:
1. If the economy grows rapidly, it is expected to raise Central Bank interest rates to slow growth, and so the bond prices should fall.
2. If the economy slows, it is expected that the central banks lower interest rates to stimulate the economy, which implies that bond prices will rise.
3. If there is much inflation rates expected to rise.
4. If low inflation is expected that interest rates unchanged.
5. If the country has fiscal problems (case Greece), countries can issue new debt with higher coupons, but also expect higher interest rates, so prices can drop.
6. If the country is an exporter of raw materials (if Venezuela), bond prices may be more tied to their price expectations (oil, for example) that at the same rates of interest, which may explain movements that correspond with the rest of the market.
7. If the country or the issuer, have problems bonds fall in price regardless of charges (higher risk) and, if on the contrary hits a drive on the market, its bonds will rise. At this point it pays to know the views of rating agencies.
If you have a high interest in the economy, bonds can be his own because, as we rely primarily on the economy. Of course there are other issues of interest with respect to the bonds that we can go deeper later, but I have seen so far, is to avoid boredom for the next 15 years.