Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 52

year Treasury bond or long bond. This condition is referred to as the inverted yield curve. Based on history, some economists view such condition as a precursor to recession.)

Here is how the bond yields move up or down. If an investor buys $1,000 worth of bonds at 6% yearly interest, the yield of the bond is also 6%, meaning that the bondholder would receive yearly interest payments of $60.

$1,000 x 6% = $60

But since most bonds are marketable securities, their base price on the open market can change depending on supply and demand, driven by factors such as inflation, Fed decisions on interest rates, and speculation. If, for example, demand is decreased, the same bond may be obtained for $960 in the market while the interest rate (which remains constant during the life of the bond) would remain at 6% per year based on its face value of $1,000. In this scenario then the bond yield would be calculated at:

$60 / $960 = 6.25%

The change in bond yield based on 1/100 of a percentage point is expressed as basis points. So in this case the bond yield moves up by 25 basis points:

6.25%-6% = 0.25% or 25 basis points

If, on the other hand, the bond price moves up to $1,029, the bond yield is works out to:

$60 / $1029 = 5.83%

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Table of Contents
Copyright and Disclaimer
Book Chapters
Table of Contents Copyright and Disclaimer Foreword Money
Bonds Futures Stocks Options
Mutual Funds Retirement Final Words Appendix A

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