Bonds?
i have this constant struggle and hope to get everyone’s thoughts on this - bond values and interests are inversely related. when the interest rate of the bond goes up, the value goes low. and the reverse is also true.
so net nett - you lose value and collect high interests or gain in value and collect pitiful interests.
why does anyone bother to deal with bonds in the first place?
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s2nw2g : But if you buy into a bond issue recently say at 4.5%. When interest drop, bond value go up. what you mention apply to existing bond issue at 1%. That is why bond value drop when ir drop, cos DCF of the coupon decreased.
isaac k3 : Right, I have some questions about that too. Since interest rates and values are in the opposite direction, why should I buy them? Take the current situation as an example. Many people suggest that you can buy bonds because interest rates are rising, but at the same time, prices are falling, and the interest rate you earn isn't enough for the price to drop much. Why should you invest in Zhai Bian
doctorpot1 : if you hold till maturity the drop in price doesn't matter as closer to maturity it will go back to par value. same with bond that is trading at a premium, it will go back to par.
the reason price drop is only because future bond have a better interest rate, so the price drop so that the yield will be the same. cause no one wants to buy a bond getting 3% when there is a bond getting 4%, so the 3% bond must give discount to be attractive.
but closer to expiry, the price will go back to par. think about it, if you bought a bond at par $100, now this bond expire tmr, means tmr you get back $100. who will sell it at $90? even $99 also won't sell de. cause tmr will get $100. so closer and closer to expiry, you will see price go back to par.
agar agarOP : Thanks for that! Really making sense now.