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Suppose the government of a country issues a bond. A certain bank buys that bond:

  • The bank loaned a certain sum of money to the government.

  • The government has to pay interest every x intervals of time and the face price at the maturity date to the bank.

What if the bank sells that same bond that it bought to the public. What happens then? If I buy the bond:

  • I give a sum of money to the bank
  • The bank now has to pay me interest and the face price at the maturity date?

What happens to the government in the equation?

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If the bank sells me the bond they bought from a municipality, I am now simply entitled to the bond's remaining cash flows from the municipality. The price I pay for the bond from the bank is equivalent to the discounted present value of all remaining cash flows.

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