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Suppose the face value of a bond is $M$ and its interest rate is $\tau$. This means it will pay $\tau \cdot M$ interest every year (other periods are also possible) and at the end of its run (its maturity) it will also repay the face value $M$. Government bonds are usually sold in auctions. Whatever ends up being the market price is considered to be the ...


5

The most famous perpetual bonds are UK Government Bonds known as consols. They weren't issued to avoid the rollover risk you highlight. Rather, their key benefit was liquidity. They could sell new consuls on the same terms as the old consuls and they have enhanced liquidity because it made the new and old issue more liquid. They turned out to be a pretty ...


5

Bond yields falling from their current near-zero position will place them in negative yield territory. Negative bond yields are deflationary by definition. Paragraph 3, sentence 5 of the article says: With Bank Rate already close to the floor, and some UK bond yields now in negative territory... [emphasis added] To understand why negative bond yields ...


5

There is a fair amount of ambiguity to this question. The first question is: what is the yield curve? A fixed income investor may refer to the yields across all maturities as the yield curve, while economists pick the difference in yields between two arbitrary maturities as the yield curve. Which two? Typical choices are the spread between the 2-year and 10-...


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Yes, there's daily data available on the St. Louis Fed's FRED.


4

They just issue new debt to roll over the principal anyway. Unlike individuals, they do not have a fixed life span. Trading amortising bonds in the secondary market is a pain, since you then need to keep track of the amortising schedule when pricing them. (This point was discussed in comments. The calculations for amortising bonds in 2018 are straightforward,...


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I’m currently researching this topic, and I have not found any single reference that answers this (... besides my work). I will summarise what I have seen. I would point out that from a research perspective, having the yield curve work is interesting, while a failure to predict recessions is not interesting. Very few journals publish articles on failed ...


3

German bonds placed as a reference in the eurozone is a form of tacit understanding and i don't think you will find official conventions about this. This practice comes from market Finance pricing technics, as the CAPM, which use a risk (-free-rate) referential to price different kind of assets. Given the higly positive trade balance of Germany, the ...


3

The short answer is no, rate hikes have no effect whatsoever on whether a government can service its debt and repay maturing issues. Here's why--- A government that issues debt in its own currency can always print currency to make its debt payments. This is an extremely important point, despite that certain political actors would like you to forget it. ...


3

"And also does this have anything to do with discounting vs. coupon bonds, etc?" It does. Assume a bond without coupons, to be fully re-paid in a single payment. On it ("face value" $\equiv B$) the bond writes the amount to be paid, as well as the date of payment. In such a situation, the "face value" includes both the principal amount and the interest....


3

Think of it this way: A dollar today is worth more than a dollar tomorrow Why? Because today you can invest it, and have more money tomorrow! How much more money? It depends on the interest rate. The interest rate on government bonds basically says: "Whoever you are, if you lend me this money I am going to give you back all of it plus a certain interest". ...


3

Here's a non-technical answer: Bonds are a form of debt. What the issuer is selling is essentially a promise to repay the principal (i.e. whatever price the buyer paid) and some interest to the buyer. (Note: since we're talking about debt, you could also think of the buyer as a lender.) In return, the issuer gets to use the money from the sale for ...


3

Central banks usually buy back government bonds to combat deflation and facilitate economic growth. This policy is commonly called "quantitative easing" or QE. After the arguable success of QE during 2008-2009 recession in the United States, many other countries choose to adapt this monetary policy. It is very unlikely that the Bank of Japan will keep this ...


3

This is a pretty standard bond pricing issue. The short answer is yes, the market value of the bond can and often will exceed its par value if interest rates are below the coupon rate, just so long as the call option is structured such that the government must pay any interest that has accrued between the last coupon date and the time that the call option is ...


3

I cannot see the mechanism as to why if central banks set rates in positive territory when long term bonds yields are negative how this will cause the yield curve to invert. No need to seek a mechanism because the inverted yield curve occurs by definition in the scenario you describe. This Investopedia video defines inverted yield curve as follows: An ...


3

Fannie Mae and Freddie Mac bonds have long been viewed as having an implicit government guarantee, and though they received government support during the crisis, they never missed a payment to bondholders. This implicit guarantee was strengthened in July 2008 when Congress passed the Housing and Economic Recovery Act of 2008, which created a channel through ...


3

How can the bond market be overvalued? To value a bond, you need, as you mention, to discount future cash flows. The cash flows (or coupons) are fixed, but the discount rate is not, and every investor may have a different view on interest rates and hence price bonds differently. Therefore, someone thinking that interest rates will remain at rock-bottom ...


3

There’s two prices for a bond: Invoice or dirty price: what you actually pay; and the clean price, which is the dirty price less accrued interest. In market convention, the clean price is the quoted price. Accrued interest starts off at \$0 at a coupon date, and then rises (roughly) linearly each day until it matches the value of a coupon at the coupon ...


3

[I can't possibly compete with the credentials of Brian Romanchuk so I write this answer simply to continue the discussion.] Isn't there an argument based on maturity transformation? Maturity transformation is that process by which banks create long terms loans from short term deposits. So, equity share price analysts will take about how a steeper yield ...


3

What do interest rates tell us about the state of an economy? Very little. That is because interest rates are a mechanism aimed at influencing one of many variables of an economy, rather than to diagnose it/them. Interest rates are a one-dimensional dimensional parameter, whereas the state of an economy cannot be captured with just one number. For ...


3

Yes, the number you give is an approximation. If you wanted to calculate the true economic breakeven, you would need to include the effect of the lag used in the indexation process (which includes known inflation information), coupon cash flows, seasonality of inflation, etc. If there is a maturity mismatch, then you would need to decide how to handle that ...


3

What you describe as "complex interaction term" is typically referred to as composite variable. Interaction terms are products of two or more variables. You also use terms like "effect" and "meaning", which in more technical sense, seem to refer to issues of unbiasedness, accuracy, and interpretation. If a composite variable is a linear combination of ...


2

Using an example from the US treasury's website you can buy a \$100 dollar face value bond that pays 3% annual interest semiannually for thirty years. That means you would get $100 \cdot 3\% / 2 = 1.5$ dollars every six months, and at the end of the thirty years you also get \$100. In total you would get $1.5 \cdot 2 \cdot 30 + 100 = 190$ dollars but as it ...


2

Short answer: A bond issued by a company is less risky than a share of the same company. Longer answer: A company is in bankruptcy if its assets are worth less than its obligations. In case of bankruptcy the assets are sold off in the market or by individual agreements with the creditors. Direct creditors are payed first. If there is any money left, bond ...


2

I heard in a lecture at my university, that measure theory is applied in finance. This field also operates with negative probabilities a lot. Anyways, I don't see the practical intuition behind using negative probabilities in a bond-pricing model. You can check this article by Burgin and Meissner: Negative Probabilities in Financial Modeling (Wilmott ...


2

This is referred to as Quantitative Easing in the field. The theory behind this is that when nominal interest rates have been cut to zero, asset purchases from the private sector at market prices will swap cash for assets on private balance sheets. These assets are most often sovereign and quasi-sovereign debt but can also be corporate bonds or stocks (as in ...


2

Because this is how the "government issues new money" in the era of (quasi) independent central banks: instead of directly issuing new money, the government in the narrow sense borrows from the central bank (which has been awarded the "printing privilege") so this new money is recorded as debt burdening the government (plus interest), which then is ...


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1) In principle, there is nothing material to stop the central banks. Apparently, during the great recession in the 1930's in the US, the fed bought even stranger stuff. They could go domestic bonds, equities, houses, etc, and then they could go to foreign assets. 2) No, they cannot literally go bankrupt because they can always print money. Some banks have ...


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I've changed order slightly, for ease of explanation. I think I'm confused because I don't quite understand the specifics of bond trading. So the bonds that I own in period t−1, is their yield flexible? In the real world (and more complex models) certainly - otherwise bond trading would be rather boring. During the day, bond traders exchange bonds ...


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This is extremely common in institutional markets, and is called a "repo" transaction - short for Repurchase agreement In a repo transaction, you "sell" the bond to the bank and agree to buy it back again at a fixed price in the future (regardless what the actual market price may be). This is the same business model as pawnbroking. If you fail to buy the ...


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