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Bond yields decline
Why is it in the news?
- Bond yields softened on 4th March, amid rate cut hopes, with the yield on the 10-year government bond dropping 12 bps to close the day at 6.23%.
- As U.S. Federal Reserve reduced interest rates to fight the economic slowdown due to the spread of COVID-19, there is growing expectation in the domestic market that the Reserve Bank will follow suit.
More in the news
- 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).
Source
The Hindu.