Q & A: Why importance of bond markets

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1. December 2009, at 14:48 pm last updated Governments auction bonds government bonds to was money very much in the news in recent months.

Financial health be obtain, they can means also an important opportunity for countries seen as a barometer for a Government.

This is because the other concerns the markets on the public finances of the country, the more expensive it is for the Government to auction its bonds.

That is why countries like Greece, Portugal, and the Irish Republic it so much more expensive interest on their bonds this year win found have.

What is a bond?

Governments borrow money through the sale of securities known as bonds to investors. In return for the investor, the Government promises cash pay a fixed interest rate over time - say 4% every year for 10 years. At the end of the period the investor is paid the cash they originally cancel that particular bit of government debt is paid. Government bonds have traditionally been seen as ultra-safe long-term investments and are held by pension funds, insurance companies and banks, as well as private investors.

What is a bond market?

Once a bond is issued - and the Government has the cash - who can investors believe it and collect the interest each year until it is refundable. But investors sell can also bind to the financial markets. The price of the bond will vary as the Outlook for interest rates changes. So, for example, if the markets think that interest rates will rise sharply, then decreases the value of a bond payment fixed one of 4% for the next 10 years. Bond prices fall even if investors think it a risk of the Government, which has is the bond unable to make the annual interest payment or repayment of it are the fears in their entirety in the run-time and these Irish down bond prices was pushing have.

What is a bond yield?

That sounds complicated, but is not! The yield is the return of an investor who buys the bond to the current market price. Let us take an example. A bond is sold by a Government for 100 euros, paying an annual interest rate of 4% or 4 euro per year. The yield is 4%. But then the market price of the bond falls to 50 euro. The interest payment (coupon) is still 4 euros per year. So a 50 euro investment, the investor can get an annual payment 4 euro, for which a return or "Yield" of 8% is. Market commentators usually quote bond yields, but as prices. The important thing to remember is that bad news for bond prices down, that is until pushes bond yields.

Why important bond markets?

Because they determine how much it is, to borrow a Government. If a Government wants new money giving new bonds. But to pay the bonds at an annual interest rate is close to the current yield on bonds, which it has issued previously and are now on the market are traded (see above). If a crisis of confidence drives leads market the Government has so pay more for new bonds and borrowings - possibly much more. (But don't forget that it affects the cost of paying the annual interest rates of bonds, the existing, because the interest rate for the life of the bond is set).

What happened to Irish, Portuguese and Greek bonds?

Their market prices have fallen in the last few months is the income (see above). The return of Irish 10 year bond reached about 9% at one point. This is very high. The British Government - despite all his financial troubles — can be rented for 10 years at just over 3%.