3 ms·
> Yield = Interest rate. This is inverse to the price of the bond. Why is that? Isn't the interest rate of a bond a constant that is set by the seller of the
by javert 13y ago
> Yield = Interest rate. This is inverse to the price of the bond.
Why is that?
Isn't the interest rate of a bond a constant that is set by the seller of the bond? So if the bond becomes more risky, the interest rate doesn't change, but the market value of the bond goes down.
Put differently, the Treasury could offer a bond with a higher interest rate, but for the same "amount," in order to raise more money.
I don't know anything about bonds or the Treasury, and I am just trying to reason it out, so please let me know if I have a mistaken premise.
- grinnbearit 13y agoBonds are a contract saying, "I'll pay you a fixed amount of money after a fixed amount of time". They then try to sell that contract on the open market. Depending on how risky the market perceives the contract to be, the price could be a lot lower (increasing the effective interest rate)
- dllthomas 13y agoIt's just how things are defined. Bonds have a value. Bonds have a term. Bonds have a price. The first two are fixed; the third changes with supply and demand. The yield is defined implicitly by these.
- Nick_C 13y ago> interest rate doesn't change You're probably thinking of the coupon rate. The yield is a different thing.