bond yield

Question 1

What is bond yield

Answer 1

Bond yield represents the amount of money investors receive from owning government debt of a percentage of it’s current price.

Question 2

What are the risks of owning bonds

Answer 2

Inflation risks- Inflation erodes the real value of bonds when repaid

default risk- when a government is unable to repay sum of all the debt

currency risk- from an exchange rate depreciation

Question 3

What will the market price for a bond fluctuate with

Answer 3

The market price of a bond will fluctuate with the demand for the bond, which is closely related to market interest rates

Question 4

What happens when interest rates rise

Answer 4

bond price falls

Question 5

What happens when interest rates fall

Answer 5

band price rises

Question 6

How can we gauge the interest rate risk of a simple bond

Answer 6

We can use modified duration, which picks up how sharply bond prices respond to interest rate change

Question 7

What will happen with bonds with large modified duration

Answer 7

Bonds with larger modified duration have higher interest rate risk, because the bond price will fluctuate more as interest rates change