Meaning of bond rates when no new bonds issued?



meriwether

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They are being sold on the secondary market. Irish bonds, after being issued by the government, are bought. They can they be sold.
Like shares. I can buy CRH shares off you, if you had them and if I had any money.

The price of the Iirsh bond is falling. The interest rate remains constant. Ergo, the yield is increasing.
 

Dreaded_Estate

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It means that the price of the bond when purchased is giving the buyer an effective interest rate of 7.5%.

The day to day changes don't immediately effect the cost of the governments borrowings but they are an indication of how risky the state is considered.

Right now, the market thinks there is a 40% chance Ireland will default in the next 5 years.
 

Gemlarkin

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If the dividends were continually reinvested

It means that the price of the bond when purchased is giving the buyer an effective interest rate of 7.5%.

The day to day changes don't immediately effect the cost of the governments borrowings but they are an indication of how risky the state is considered.

Right now, the market thinks there is a 40% chance Ireland will default in the next 5 years.
If the dividends were continually reinvested

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kerdasi amaq

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but, I'd suppose it means that new bonds issued by the Irish Government, will have to have a rate of 7.5%+ if they want to sell them.
 

Panopticon

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I'm confused. There are no new bonds being issued by Ireland, yet we are told that the rate is 7.5%+.

Who is paying 7.5% to who?
The bond pays the investor a certain fixed amount, except in case of default. The price people are paying for the bond in the market implies that they will earn 7.5% interest (annualised rate) if they hold onto it until maturity.

What Meriwether says. I found bonds the most confusing part of the finance courses I took, even more so than options. Yield and price move differently!
 

Panopticon

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but, I'd suppose it means that new bonds issued by the Irish Government, will have to have a rate of 7.5%+ if they want to sell them.
The investors would rather buy an old bond with 7.5% rate otherwise. This could be complicated by the seniority of debt, which I'm not sure about.

Remember that the bonds themselves don't come with a rate attached - the price that investors pay would just imply 7.5% interest.

If bond prices are falling, and I can see from Bloomberg that trade volumes are shooting up, is someone flooding the market?
It could mean lots of things. It could mean that new information has come out, e.g. today's budget report.
 

gijoe

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If bond prices are falling, and I can see from Bloomberg that trade volumes are shooting up, is someone flooding the market?
I'd say that they are forming an orderly queue to exit Irish bonds, only no one is buying!

On the point of the price of bonds when none are being issued. The circa 7.5% rate is what a willing seller and a willing buyer are willing to pay.

So if I have a €1billion 10 year Irish bond with a 5% coupon that I want to sell I have to reckon on selling it for only circa €670million and taking a circa €330million loss as this is the price of the bond that would reflect a 7.5% yield.
 

meriwether

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but, I'd suppose it means that new bonds issued by the Irish Government, will have to have a rate of 7.5%+ if they want to sell them.
Exactly. An Irish bond you buy from the Irish government is exactly the same (apart from diff types of bonds) as an irish bond you buy from Gunther. Its has the same risk profile and will be honoured by the same govt.
Therefore, you wouldn't buy a bond from the Irish govt for 4% when you can buy it from gunther for 7.5%.
 

gijoe

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Exactly. An Irish bond you buy from the Irish government is exactly the same (apart from diff types of bonds) as an irish bond you buy from Gunther. Its has the same risk profile and will be honoured by the same govt.
Therefore, you wouldn't buy a bond from the Irish govt for 4% when you can buy it from gunther for 7.5%.
Not quite. The government could issue a €1billion bond with a 5% coupon, however it would have to reckon on only receiving circa €670million for their €1billion bond to reflect the 7.5% market rate.
 


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