Buying and Selling Bonds

bonds, governments, companies, financial, buy and sell

______ are not only issues by __________ and __________ — They can also be trade in _________ markets. This means investors can ___ and ____ bonds after they have been issues, similar to how shares are traded.

primary, seocndary

different types of markets where bonds can be bought and sold

primary market

the bond if sold for the first time by the government or firm to raise finance

UK gov sells a new 10-year gilt at £100 face value

Application for primary market

secondary market

investors trade bonds with each other after the original sale

one investor sells the bond to another at £95 or £110

Application for secondary market

regular income, lower risk than shares, known maturity rate

Why do investors buy bonds?

interest rates change, risk level of the borrower, supply and demand from investors

Why are bond prices in the secondary market not fixed?

interest rate effect

• This explains why bond prices change due to the inverse relationship between bond prices and yields

• Market interest rates rise => existing bond with lower coupons=>less attractive=>bond price falls=>yields rise

• Market interest rates fall => existing bond with higher coupons=>more attractive=>bond price rise=>yields fall

expect interest rates to raise and lower prices, need cash fast, wish to switch to different investment with higher return

Why may investor sell their bonds?

gov and corporate borrowing costs increase, investment may fall, AD may decrease

Impact of bond yields rising on the economy

cheaper borrowing, investment and spending may rise as well as AD

Impact of bond yields falling on the economy

new bonds issued with higher coupon rates, existing bond with lower coupons=>less attractive(lower return), investors only buy old bonds at lower price(more attractive), price falls=>yield automatically rises

When interest rates rise => bond prices fall => yields rise

new bonds issued with lower coupon, old bonds pay higher coupon become more attractive, investors demand these bonds which rise their price, as price rises the yield falls

When interest rates fall=>bond prices rise=>yields fall

gov borrowing costs, mortgage rates and corporate loans, investment and consumption, AD

Bond yields affect the wider economy because they influence:

higher borrowing costs lower AD

How do higher yield impact the economy?

cheaper borrowing costs raise AD

How do lower yield impact the economy?

same, opposite

interest rates and bond yield move in the ____ direction, but bond prices move in the _________ direction

yield

tells the investors what return they are earning based on the price they paid for the bond. Investors mainly use his in the secondary market, not when the bond is first issued

fixed, face value, yield

In the primary market, the bond has a _____ coupon and face value so the return is clear. In the secondary market, the price can go above or below the ____ ____, so investors need the _____ to compare the return with other investments.