What determines bond prices on the open market?

July 7, 2024 No Comments

A: One of the most basic concepts that investors should become familiar with is how bonds are priced. Bonds do not trade like stocks. The pricing mechanisms that cause changes in the bond market are not nearly as intuitive as seeing a stock or mutual

What does a negative bond yield mean?

July 7, 2024 No Comments

A: If a bond has a negative yield, it means the bondholder loses money on the investment, though this is relatively unusual. Whether a bond has a negative yield largely depends on the type of yield being calculated. Depending on the purposes of the calculation,

If I buy a $1,000 bond with a coupon of 10% and a maturity in 10 years, will I receive $100 each year regardless of what the yield is?

July 7, 2024 No Comments

A: Simply put: yes, you will. The beauty of a fixed-income security is that the investor can expect to receive a certain amount of cash, provided the bond or debt instrument is held until maturity (and its issuer does not default). Most bonds pay interest

Under what circumstances might an issuer redeem a callable bond?

July 7, 2024 No Comments

A: The primary circumstance under which a bond issuer redeems a callable bond is a drop in interest rates. When rates fall, it makes no sense for the bond issuer to continue paying higher-than-average interest to investors when a provision in the bond allows for

Interest Rate Risk Between Long-Term and Short-Term Bonds

July 7, 2024 No Comments

A: The answer to this question lies in the fixed income nature of bonds and debentures, often referred to together simply as “bonds.” When an investor purchases a given corporate bond, for instance, they are actually purchasing a portion of a company’s debt. This debt

Understanding the Effects of Fiscal Deficits on an Economy

July 7, 2024 No Comments

A: Fiscal deficits arise whenever a government spends more money than it brings in during the fiscal year. This imbalance, sometimes called the current accounts deficit or the budget deficit, is common among contemporary governments all over the world. Since 1970, the U.S. government has

Is variance good or bad for stock investors?

July 7, 2024 No Comments

Variance is neither good nor bad for investors in and of itself. However, high variance in a stock is associated with higher risk, along with a higher return. Low variance is associated with lower risk and a lower return. High variance stocks tend to be

Knowing the Difference Between EE and I Bonds

July 7, 2024 No Comments

A: Both EE and I bonds are part of the U.S. Treasury’s savings bond program, which is designed to offer low-risk investments with tax advantages. Despite their similarities, Series EE bonds and Series I bonds are very different financial products in practice. The EE bond program is

Learn to Calculate Yield to Maturity in MS Excel

July 7, 2024 No Comments

A: In order to understand yield to maturity (YTM), we first need to discuss how to price a bond in general. The price of a traditional bond is the present value of all future cash flows the bond delivers (interest payments), plus the repayment of principal

Macaulay Duration vs. Modified Duration

July 7, 2024 No Comments

A: Macaulay duration and modified duration are mainly used to calculate the durations of bonds. The Macaulay duration calculates the weighted average time before a bondholder would receive the bond’s cash flows. Conversely, modified duration measures the price sensitivity of a bond when there is

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