Sunday, September 22, 2013

Interest Rates, Financial Markets and Bonds

Interest Rates, Financial Markets and Bonds 


U.S. Treasury
bonds, by virtually any definition, are simply a loan. The U.S. government
borrows the funds it needs to operate, including financing the federal
deficit. Ultimately, taxpayers will have to pay back the loan.
When a bond is issued, the price you pay is known as its face value.
Once you buy it, the government promises to pay you back on a specific day
known as the maturity date. It issues that instrument at a predetermined
rate of interest, called the coupon. For instance, if you buy a bond with a
$1,000 face value, a 6 percent coupon, and a 10-year maturity, you would
collect interest payments totaling $60 in each of those 10 years. When the
decade is up, you get back your $1,000.
If you buy a U.S. Treasury bond and hold it until maturity, you will know
exactly how much you’re going to get back. That’s why bonds are also known
as fixed-income investments—they guarantee you a continuous set income
backed by the U.S. government. What confuses most investors in bonds is
the concept of yield and price. Simply stated, when yield goes up, price goes
down, and vice versa.

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