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Speaker 1: Welcome to Ask Fear and Greed, where we take your

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Speaker 1: questions and do our very best to answer them. I'm

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Speaker 1: Michael Thompson, and good afternoon, Sean Almer.

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Speaker 2: Good afternoon, Michael.

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Speaker 1: Sean. Today's question it feels like it's going to be

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Speaker 1: right up your alley. It comes. Goodness, I risk derailing

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Speaker 1: us quite early on today. It has come from Schalise

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Speaker 1: and it is coming vi Instagram. Salise has contacted us

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Speaker 1: on Instagram. We're on there at Fear and Greed podcast

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Speaker 1: and she says, guys, can I ask a question about bonds?

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Speaker 1: Does yield equal the amount of interest a bond pays you?

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Speaker 1: If you buy a ten year bond at say five percent,

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Speaker 1: does that yield stay consistent?

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Speaker 2: E g.

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Speaker 1: You're guaranteed to get five percent every year for the

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Speaker 1: full ten years. See what I mean? This is right

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Speaker 1: up your alley.

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Speaker 2: You love, great question. It took me a long time

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Speaker 2: to get my head around the answer to this.

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Speaker 1: Have you got your head around it now?

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Speaker 2: Yeah? Yeah. It's It's one of those ones that if

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Speaker 2: you were in the bond market, you'd think, well, this

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Speaker 2: is pretty obvious. But for the ninety nine point nine

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Speaker 2: percent of us who aren't in bond markets. It's not

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Speaker 2: obvious at all. Okay, So if I went out and

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Speaker 2: bought a government bond, a brand new government bond, one

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Speaker 2: hundred dollars, it's worth paying a coupon rate. Coupon rate

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Speaker 2: important phrase, of five percent. That means every half year,

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Speaker 2: let's say I get two and a half percent of

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Speaker 2: that one hundred dollars two dollars fifty, next half year,

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Speaker 2: two dollars fifty. So the coupon rate of five percent

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Speaker 2: does not change. What does change, which impacts the yield,

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Speaker 2: is the price of that bond. So it's initially issued

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Speaker 2: for one hundred dollars, something might happen, which means people

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Speaker 2: don't want the bond, so the price of it drops

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Speaker 2: to ninety nine dollars, ninety eight dollars. You're still getting

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Speaker 2: the five percent coupon rate, so the yield is five

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Speaker 2: percent on whatever you bought it for, So five percent

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Speaker 2: on ninety eight dollars rather than five percent on one

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Speaker 2: hundred dollars. Therefore the yield, your return rises. So when

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Speaker 2: chair when bond prices fall, yields rise. Now the question

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Speaker 2: is why would the price fall. It might be that

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Speaker 2: suddenly the five percent, and the Reserve Bank says we're

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Speaker 2: going to lift interestrates in the future, we'll investors think, well,

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Speaker 2: hold on, I don't want that particular bond because you

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Speaker 2: know they're going to issue another bond in three months

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Speaker 2: time and that's going to be six percent, not five percent,

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Speaker 2: So I don't want that one. So it's price drops.

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Speaker 2: So it kind of evens out across bond markets in

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Speaker 2: that the price might fall because Reserve Bank's going to

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Speaker 2: lift interest rates. Therefore, the yield you get the original

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Speaker 2: coupon rate on the price you pay increases to make

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Speaker 2: it competitive with the bond that might be issued in

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Speaker 2: three months time at six percent.

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Speaker 1: Did that make sense to you, Michael? It made sense

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Speaker 1: right up until the very end. I was following you,

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Speaker 1: and about ten seconds ago I'm like, oh, I think

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Speaker 1: I've just fallen off somewhere. So okay. So so there

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Speaker 1: is still fluctuation in the price. And so because when

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Speaker 1: we talk about when we talk about bonds, I was

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Speaker 1: talking about them being the kind of the safest, Yes,

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Speaker 1: but there is still you so.

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Speaker 2: What the coupon rate never changes, so the five percent

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Speaker 2: example never ever changes. What changes is how much someone

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Speaker 2: is willing to pay for the face value they call it.

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Speaker 2: So you know, when it's first issue, it's one hundred

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Speaker 2: dollars five percent, so your yield is five percent. That

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Speaker 2: what people is willing to pay for. That changes, so

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Speaker 2: it might go up to one hundred and one dollars.

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Speaker 2: You're still getting five percent, but it's five percent on

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Speaker 2: one hundred and one. Maybe goes down to ninety eight dollars.

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Speaker 2: You're getting five percent on ninety eight dollars. And that's

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Speaker 2: the year that changes, Okay, So the coupon rate never changes.

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Speaker 1: Yeah, And typically there for a set term or like

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Speaker 1: ten years, three years, say.

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Speaker 2: Ten years, three years, two years, whatever. And if you

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Speaker 2: just hold the bond, so you buy it for one

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Speaker 2: hundred dollars five percent, you don't do anything with it.

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Speaker 2: You never actually sell it later in the secondary market.

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Speaker 2: You just hold on to it. Well, you get at

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Speaker 2: the end of it, you get your hundred dollars back,

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Speaker 2: having earned five percent a year over the three years

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Speaker 2: or the ten.

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Speaker 1: Years, even if the price has gone down of the.

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Speaker 2: This is yeah, so this is when if I buy

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Speaker 2: it new and I just hold it until maturity, so

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Speaker 2: I don't try and sell it or anything like that.

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Speaker 2: Then you just get one hundred dollars back. Each year

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Speaker 2: you get five percent. But in what professional investors do,

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Speaker 2: they buy and sell bonds. So they buy a bond,

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Speaker 2: but then they sell it in the secondary market. That's

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Speaker 2: where you're getting price changes and yield changes. Okay, I

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Speaker 2: don't know whether you're with me on that one mine, no, no,

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Speaker 2: I am, but I'm just like, reaches maturity.

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Speaker 1: So you're at the end of the ten years, are

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Speaker 1: you going to be getting that full hundred dollars back?

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Speaker 1: Even if the price has changed in that kind of

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Speaker 1: intervening period to say ninety eight or one oh one,

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Speaker 1: are you still set to get that full figure back?

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Speaker 2: So in that instance, I have held it from the

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Speaker 2: day one to the final day, so the price didn't

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Speaker 2: ever change for me. So I'm not buying or selling it.

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Speaker 2: It's only if I'm buying or selling it that the

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Speaker 2: price changes. So you think of a house, right, you

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Speaker 2: buy a house for a million dollars and it goes

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Speaker 2: up to one point two million, then it goes down

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Speaker 2: to nine hundred thousand. Then to you it's still you're

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Speaker 2: still paying your loan repayment on a million dollars.

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Speaker 1: Yep.

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Speaker 2: It's only when you actually buy or sell that you've

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Speaker 2: got to think about that stuff.

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Speaker 1: There is it just got a little bit brighter in

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Speaker 1: this studio, and it is because the light bulb just

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Speaker 1: went off over my head. I understand it.

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Speaker 2: It is actually it is hard to understand because you

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Speaker 2: are well for years, I got the coupon rate in

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Speaker 2: the yield mixed up with each other, all right, But

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Speaker 2: the coupon rate never changes. The yield does because the

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Speaker 2: price does.

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Speaker 1: Well. Look, I think that was kind of less Schalisa's

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Speaker 1: question and more about half a dozen of my own

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Speaker 1: in there. But I think you have done a very

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Speaker 1: good job of explaining bonds broadly.

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Speaker 2: Maybe maybe not more than bond bonds are very very

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Speaker 2: interesting things.

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Speaker 1: Well, you know what I'm actually with you there. I

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Speaker 1: found that I found that remarkably interesting. And I've even

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Speaker 1: got my genuine face on here, Sean. I mean what

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Speaker 1: I'm saying. Look, Chalise, I hope we answered your question.

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Speaker 1: I say we, I hope. I hope Sean answered your

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Speaker 1: question satisfactorily. If you didn't, please feel free to send

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Speaker 1: through a follow up and we'll devote another episode of

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Speaker 1: Ask Fear and Greed to talking about Bonds, which I'm

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Speaker 1: sure Sean.

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Speaker 2: Never too many episodes on Born's.

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Speaker 1: Oh goodness, well, just have our own little Bond stream

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Speaker 1: of just podcasts about Bond would be quite a niche

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Speaker 1: audience would be niche, definitely, yeah, but you'd be very excited.

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Speaker 1: Thank you Salise for the question, and thank you Sean,

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Speaker 1: Thank you Michael. Remember, if you've got something that you

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Speaker 1: would like to know, then please send thro your question

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Speaker 1: like Shalise did on Instagram, or head along to LinkedIn

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Speaker 1: or Facebook, or we can send an email through our

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Speaker 1: website Fearangreed dot com dot au. I'm Michael Thompson and

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Speaker 1: this is ask Fear and Greed