Unlike the stock market when the bond yield increases, its price actually decreases. This is actually a little different from what we normally observe. Below you will find a detailed explanation of exactly what is happening.
Understanding the concept is quite simple. This is a piece of paper that promises you to repay your invested principle after the due date plus interest (single or compound) at fixed intervals. These are not the same as market shares. When you own a share of the business, you are partly the owner of the company and its risks as long as you own shares. The bonds in the other hand have a due date and you will get the promised interest on the money and you will get back your principle after the deadline.
There are different types issued by different entities. The federal government, provincial governments, local governments, businesses, etc. Bonds are generally considered a very wise investment if issued by a financially sound government. There are cases where a government has failed.
Bonds have few important terms, such as price, interest rate, par value, maturity date and finally bond yield. Generally, in the mortgage market, the most discussed conditions are price and yield.
Suppose you have a $ 100 bond with a maturity of 2 years. The interest rate is 6% per annum. You will receive a total of $ 12 (based on a simple interest) during these 2 years. Now, you want to sell your bond in the middle of the term. You get a bid of $ 90 for this bond. The new owner will receive $ 106 after one year for a $ 90 investment. He / she will win (106-90) / 90 = 17.78% on this link. This is what is called bond yield. As a result, when bond prices fall, yields rise.
Here are some examples of many types of bonds available on the market.
– Convertible links
– Corporate bonds
– expandable / retractable bonds
– Foreign currency bonds
– State bonds
– high yield bonds
– bonds indexed to inflation
– US securities protected against Treasury inflation (tips)
– Securities backed by mortgages
– Zero coupon or "strip" bonds
– Asset backed securities
Many market analysts tend to use yield curves to predict the future. This is not a very well-proven idea. Many times, these forecasts have missed their goals. This can give you a fair idea of what's coming, but not without its disadvantages.