How Do Bonds Work?


A friend of mine transferred his 401K shares in bonds late last year because he thinks the change is coming. While that assumption was not impossible, it unfortunately missed last year’s market. Any good financial advisor can tell you not to try the market time and I find it, but someone should know what is going on. And in order to do this, you need to know how bonds work and how they interact with stocks. As a result, a friend called me to ask how the bonds work.

Let’s start with some basic home maintenance items:

Bond yields have a negative relationship with high prices.

Bond yields have a positive relationship with the stock market.

Easy peasy. But most people, even investors, do not understand why. Before I get to that, I will explain what the agreement is.

Buy Bond

Buying a bond is like borrowing money. You pay their debt, called a “price,” and they promise to repay you. By IOU. If you buy a 10-year bond, they will have to pay you back in 10 years. In the meantime, they charge you interest. That’s yours payment for allowing them to have money for ten years. It is called “harvest” on the bond.

If it is a Treasury Bond, the US Government is a lender. They use the money you have lent them to do all the things that the US Government does. They build bridges and buy throws and provide checks for incentives, and pay government officials’ fees and pay interest on all their other bonds and things like that.

While there are a number of different lengths of time you can buy, I’m talking about a ten-year contract here. This is where house prices are fixed. With a ten-year bond, the government has ten years to repay it. In return you receive interest on the loan. Currently, it is 1.528%. Not so much when you pay 18% or more of your credit card debt, but it is guaranteed by the US Government and more than just putting your money under the mattress or savings account in this regard.

Secondary Market

Because sometimes people can’t build their finances for a decade, or change their mind and want to buy a Porsche, there is a second market for construction. You can sell to other people within ten years. Here is the important part – the yield of your tie does not change. In my example, it is 1.5% closed for ten years.

Let’s say a few months from now once you choose your Miami Blue Porsche 911, interest rates go up and you can buy a 10-year bond with a 2% yield. Yields rose from 1.5% to 2%. This is worth a lot of money, isn’t it? Those who buy 2% bond are making more money than you are now. That is why the price you sell your bond to someone else goes down. Why? Because instead of buying a 10-year bond from you that pays 1.5%, they can buy a new ten year old bond and make 2%. Conversely, if the yield on a new contract drops to 1.3%, the value or value of your contract will increase, because your contract gives a higher yield of 1.5%.

That is why yields and contract costs have a different relationship. It all takes time.

There is a way to calculate the value of your bond. As of today, yields of 1.5% You do not need to know this because the prices are calculated and printed. But here’s what you need to know:

Bond Price = ∑ (Cn / (1 + YTM) ^ n) + P / (1 + i) ^ n

  • n = The time it takes items from 0 to nth until the last exit
  • Cn = Payment of coupon in nth time
  • YTM = interest rate or yield required
  • P = Par The benefits of a partnership

So if you bought your bond yesterday and want to sell it today, your price dropped by .082%. Once again, the tree is printed and easy to look at so you don’t have to master math.

How Bonds Affect Stock Market

Bonds also have a relationship with the stock market. As yields on construction go down (and their prices go up), the retail market often goes down. Why? The rationale is that the bonds compete with the equity shares of investors. As the stock market rises, people put their money into stocks and withdraw it from bonds, so that the price of bonds goes down. And as the cost of construction decreases, (from the surplus), the price decreases and the yield increases because as we have explained above and shown in the process, yields and construction costs always flow in a pre-established relationship.

There are a number of psychological reasons why stocks go up and down. Too often, economists believe in the rational man-theory of rationalism. If a company loses money, their shares should go down, and it follows that people cannot buy the property or if they already have it, they can sell it. But there are also many other issues that are involved including how people view the future of the company or its assets. Shares rely on the psychology of individuals, companies and groups. But now you know how bonds work, and how bonds work in relation to the stock market.


Disclaimer: All information contained herein, including ideas, assumptions, assumptions, predictions, predictions, comments, opinions, or stock options, described herein, is for informational purposes only, and is not to be construed as a financial prerogative. .


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