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Bond yields fall
Why is it in the news?
- The yield on government bonds fell sharply for the first trading session after the Union Budget presentation.
- The fall in yield is reported because government avoided extra borrowing and also opened certain government securities for non-resident investors.
More in the news
- Data:
(1) The yield on 10-year benchmark government bonds closed the day at 6.51%, down 10 bps from its previous close on Friday.
(2) Despite missing the target for fiscal deficit of 3.3% for FY19, and projecting a fiscal deficit target of 3.5% for the next financial year, the gross borrowing programme of the government was retained at ₹7.1 lakh crore for the current financial year.
(3) Gross borrowing for the next year is pegged at ₹7.8 lakh crore which is in line with market expectations.
- How do bonds work?
(1) Consider a bond that is issued by a company or government for Rs.100 with a coupon of 7% for a period of five years.
(2) This implies that every year, the issuer will pay interest of 7%, while the principal will be refunded after the bond matures.
(3) What drives the bond market is the fact that bondholders are free to sell their bonds before maturity.
(4) The face value of a bond is what it sold for initially. Since they are transferable through sale in the bond market, their value fluctuates.
(5) The returns accrued by holders is measured by the yield, which is the rate of interest paid as coupons.
(6) Yield is calculated as the coupon divided by the value of the bond. It is multiplied by 100 to be expressed in percentage. In effect, yield = (coupon/value)*100).
(7) In the example considered above, if the face value of the bond fell to Rs.80, the yield would rise to 8.75%, that is (7/80)*100). Correspondingly, if the value rose to Rs.120, the yield would drop to 5.83%, that is (7/120)*100).
Source
The Hindu.