4 ms·
There's one thing I don't understand. If I'm buying low yield bonds for 100B, even if interest rates go much higher, shouldn't I still be able to sell the bond
by epolanski 4y ago
There's one thing I don't understand.
If I'm buying low yield bonds for 100B, even if interest rates go much higher, shouldn't I still be able to sell the bonds for 100B?
There's still an obligation by the government to give me 100B back at the end of the loan.
- cornstalks 4y agoNot necessarily. They’re worth 100B still, but they require the purchaser to “lock up” their capital. If you need liquid cash now and potential buyers are only interested in locking up their capital for higher gains/rewards, you might consider selling at a loss.
- shkkmo 4y agoYes, and if you hold it for the 10 year term, you do get the money back, plus a small amount of interest. The problem is that now, you can buy bonds with a shorter term that provide higher interest rates. Thus to sell the old bonds now, you have to sell them for less than you paid for them so that the return on them becomes competitive with buying a new bond.
- epolanski 4y agoOkay that is clear, thank you.
- evancox100 4y agoNo, if you have to sell your bonds with, say, 9 years remaining, you won't get 100B for them. Think about it, you paid 100B to get 10-yr treasury bonds paying 2%/$4 billion, annually. Now someone can go to a treasury auction and pay 100B and get 4%/$8 billion annually. Why would they still pay you $100 B for yours? They are obviously worth less.