Friday, April 1, 2011

Bond Price and "Yield" are mathematical, McC

I saw on another blog

Thought for the Day:

Nicely done methinks.   I was going to do the same, but had one epiphany for y'all

I have noticed in comments that some people don't understand the relationship between a bonds selling price and "yield".   I saw some comment like, just because bond prices go up doesn't mean that the interest rate couldn't go up too....

That is not true--Bond prices and their "yield" aka Interest Rate are the simplest inverse mathetatical realtionship.    It is not an item for discussion, arbitrage, none of that.

First the deception: They introduce this term called Yield --- really that is "interest rate", but by using another term, it takes understanding a level away from thing that humans commonly understand, which is interest.    It is a common tactic in all forms of business, however, it is especially well developed in the financial industry where they are trying to directly take your money.   People are "on guard" in those situations, so a more complex and sophisticated approach is needed.

Bonds are part of FIXED INCOME.    The amount you will be paid in a certain amount of time is say $115 in 3 years.   If you pay 100 now for that bond, you are roughly getting 5% annually (actually a wee bit less because of the compounding effect), but this is close enough to make the point.

Let's say you are scared out of equities.   You can lets your money sit in cash, or your advisor may advise to "lets keep that money working" lets buy some bonds and "stay invested".

So in panic times, lets say that same bond is selling for $112.    Equities look scary so you jump into the "safe bond".   What interest are you getting?   Well about 1%.    

What if you were a mutual fund or hedge fund forced to stay 95% invested?   And if you very concerned with would buy bonds, raising the price-- if enough people felt that way.  In fact, in the last few years there were times when a bond that would pay out at $115 in three years was actually selling for more than $115, A NEGATIVE INTEREST RATE, for the privileged of owning a safe investment!!!!

All bonds carry risk.  

Why accept a 1% or 5% interest rate, when you may have 30% of the principal removed as a "scalp haircut" nicely known in the industry as a "re-organization".

There are no safe investments at this time, only relative degrees of high risk.    Cash in USD and Gold are maybe some of the best though, IMHO.


  1. I went long AEM 2 days ago. had great profits yesterday, lost some of them today, on trailing stop. end of day, went long again. long FFIV too. I added an ATM put just in case.

  2. i heard the fomc might raise interest rates 3/4% end of year. gold may correct down to 1080's before that, if the chatter starts getting loud enough.

  3. $BRCM took a major hit today. i went long on it. i think i can at least break even at today's entry

  4. I may be over thinking it, but with so much opening publicized "raise the rates" I think it is misdirection.


Insightful and Useful Comment!