3 ms·

So their bond prices went down and made them bankrupt, how does the math work in simple terms?

by m3kw9 4y ago

runeks 4y ago
In simple terms, a bond is a piece of paper that pays a dollar amount per year to the holder for N number of years, after which the initial price paid for the bond is returned to the holder. For example, a 10-year bond that pays $2 per year costs $100 today. That is, a piece of paper that pays $2 to the holder every year for 10 years, after which the holder gets its $100 back. Now, some time passes and the market thinks the above bond is too expensive. Instead, the market will only pay $50 for the above bond, ie. $50 to get $2 per year. This means that the price of another bond: the bond that pays $4 per year will now cost $100. This is the case because holding two bonds that cost $50 each and pay $2 per year is exactly equivalent to holding a single bond that pays $4 per year and costs $100. If the market price of a 10-year bond that pays $4 per year costs $100 then we say that the current rate of interest for the 10-year bond is 4%. If this rate of interest falls to 2%, it simply means that the market is now willing to pay $200 per year for a bond that pays $4 per year — or, equivalently, $100 for a bond that pays $2 per year.
- tome 4y ago
  > after which the initial price paid for the bond is returned to the holder Probably better to say "face value". The initial price paid for the bond may well not be its face value.
shagie 4y ago
(as I understand it, and I could be wrong... and if so, please correct me) The difference between the 10 year and 3 month bonds - https://ycharts.com/indicators/10_year_3_month_treasury_spread https://ycharts.com/indicators/10_year_3_month_treasury_spre... You'll note that you can get more money buy buying a 3 month bond rather than a 10 year bond. So, now if you want to sell a 10 year $100 bond, you'll need to sell it for less than what a 3 month $100 bond costs to buy... which is $100. https://ycharts.com/indicators/3_month_t_bill https://ycharts.com/indicators/3_month_t_bill (look at 3 year chart range) and https://ycharts.com/indicators/10_year_treasury_rate https://ycharts.com/indicators/10_year_treasury_rate (again, look at 3 year range). The 10 year $100 bond is still going to pay out at a profit... in 10 years. But there's more valuable things that one can do with $100 in the shorter term so any sales of that before it pays out will be done at a loss.

So their bond prices went down and made them bankrupt, how does the math work in simple terms?

by m3kw9 4y ago

So their bond prices went down and made them bankrupt, how does the math work in simple terms?

In simple terms, a bond is a piece of paper that pays a dollar amount per year to the holder for N number of years, after which the initial price paid for the bond is returned to the holder. For example, a 10-year bond that pays $2 per year costs $100 today. That is, a piece of paper that pays $2 to the holder every year for 10 years, after which the holder gets its $100 back. Now, some time passes and the market thinks the above bond is too expensive. Instead, the market will only pay $50 for the above bond, ie. $50 to get $2 per year. This means that the price of another bond: the bond that pays $4 per year will now cost $100. This is the case because holding two bonds that cost $50 each and pay $2 per year is exactly equivalent to holding a single bond that pays $4 per year and costs $100. If the market price of a 10-year bond that pays $4 per year costs $100 then we say that the current rate of interest for the 10-year bond is 4%. If this rate of interest falls to 2%, it simply means that the market is now willing to pay $200 per year for a bond that pays $4 per year — or, equivalently, $100 for a bond that pays $2 per year.

tome 4y ago
> after which the initial price paid for the bond is returned to the holder Probably better to say "face value". The initial price paid for the bond may well not be its face value.

shagie 4y ago

(as I understand it, and I could be wrong... and if so, please correct me) The difference between the 10 year and 3 month bonds - https://ycharts.com/indicators/10_year_3_month_treasury_spread https://ycharts.com/indicators/10_year_3_month_treasury_spre... You'll note that you can get more money buy buying a 3 month bond rather than a 10 year bond. So, now if you want to sell a 10 year $100 bond, you'll need to sell it for less than what a 3 month $100 bond costs to buy... which is $100. https://ycharts.com/indicators/3_month_t_bill https://ycharts.com/indicators/3_month_t_bill (look at 3 year chart range) and https://ycharts.com/indicators/10_year_treasury_rate https://ycharts.com/indicators/10_year_treasury_rate (again, look at 3 year range). The 10 year $100 bond is still going to pay out at a profit... in 10 years. But there's more valuable things that one can do with $100 in the shorter term so any sales of that before it pays out will be done at a loss.