Bond Yields Up, Bond-values down- a counterintuitive reality
(original) Example-
Joe owns a bond that cost 1000$ that pays him $50 per year, 5%. Then bond-yields rise, as a result of which Ed buys a bond for 1000$ that pays him $100, 10%. So now Joes bond is worth only $500 on the market, because only at $500 can it reflect a yield that is the same as the new high-yielding bonds such as that owned by Ed. Hence there occurs what seems inexplicable, something that those reporting on it never attempt to explain, probably because they cannot explain it-- the rise in yields in bonds, results in a loss for those who have bonds.
However, if Joe were to hold on to his bond until it matured, Ed getting a high-yield bond would not damage Joe, something that those who regurgitate the Bank for International Settlements (BIS) statement that bond yields rising will cost bondholders money, for some reason ignore.
Confusion lies in the statement that bond yields rising will cost bondholders money. How could it possibly damage me, if my yield on a bond rose from 5% to 10%? Those regurgitating the BIS statement fail to mention that bond yields rising does not mean those who have bonds getting higher interest rates, but rather those who have bonds selling the bonds for less, in order to be able to compete with new bonds that pay higher interest rates.
And the regurgitators ignore that the counterargument is that holding the bonds until maturity will shield the bondholders from damage caused by competing bonds that pay higher interest. I can only attribute this lack of cognizance to the regurgitators not understanding that which they faithfully regurgitate.
The obvious reaction to the statement that bond yields increases will cost bondholders money is, how could a yield increase on my bond damage me?...the phenomenon of the regurgitators ignoring this obvious reaction, indicates that they, the regurgitators, themselves do not understand what they regurgitate.
The pages which contain their regurgitations look slick and professional, which enhances the level of confusion.
Notes:
Joe owns a bond that cost 1000$ that pays him $50 per year, 5%. Then bond-yields rise, as a result of which Ed buys a bond for 1000$ that pays him $100, 10%. So now Joes bond is worth only $500 on the market, because only at $500 can it reflect a yield that is the same as the new high-yielding bonds such as that owned by Ed. Hence there occurs what seems inexplicable, something that those reporting on it never attempt to explain, probably because they cannot explain it-- the rise in yields in bonds, results in a loss for those who have bonds.
However, if Joe were to hold on to his bond until it matured, Ed getting a high-yield bond would not damage Joe, something that those who regurgitate the Bank for International Settlements (BIS) statement that bond yields rising will cost bondholders money, for some reason ignore.
Confusion lies in the statement that bond yields rising will cost bondholders money. How could it possibly damage me, if my yield on a bond rose from 5% to 10%? Those regurgitating the BIS statement fail to mention that bond yields rising does not mean those who have bonds getting higher interest rates, but rather those who have bonds selling the bonds for less, in order to be able to compete with new bonds that pay higher interest rates.
And the regurgitators ignore that the counterargument is that holding the bonds until maturity will shield the bondholders from damage caused by competing bonds that pay higher interest. I can only attribute this lack of cognizance to the regurgitators not understanding that which they faithfully regurgitate.
The obvious reaction to the statement that bond yields increases will cost bondholders money is, how could a yield increase on my bond damage me?...the phenomenon of the regurgitators ignoring this obvious reaction, indicates that they, the regurgitators, themselves do not understand what they regurgitate.
The pages which contain their regurgitations look slick and professional, which enhances the level of confusion.
Notes:
posted by David Virgil at 7:10 AM
0 Comments:
Post a Comment
<< Home