Bond yields fell down

Why is it in the news?
  • Government bonds yields dropped sharply after Finance Minister clarified that there was no rethinking on issuing sovereign bonds to raise funds from abroad.
More in the news
    • The yield on the 10-year benchmark government bond fell 11 basis points (bps) over the previous close, ending Monday at 6.41%.
    • The main reason for bond yields to decline is the reassurance by the Finance Minister that there is no rethinking on the sovereign bond issue.
    • Bond yields had risen sharply last week on news reports that the Prime Minister's office (PMO) was reassessing the idea of issuing foreign currency overseas sovereign bonds.
    • The bond market also cheered the Minister’s comment on the need for sharp interest rate cuts from the Reserve Bank of India.
    • RBI has reduced the repo rate by 75 bps in 2019 and will announce the review of the monetary policy on August 7.
    • Sovereign bonds
      (1) A sovereign bond is a specific debt instrument issued by the government.
      (2) They can be denominated in both foreign and domestic currency.
      (3) Just like other bonds, these also promise to pay the buyer a certain amount of interest for a stipulated number of years and repay the face value on maturity.
      • Working of Bonds and Bond yield:
        (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) 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).
        (4) 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).
        (5) Bond yield is inversely proportional to its current value. The greater the yield, the lower the current market price of the bond.
      Source
      The Hindu.




      Posted by Jawwad Kazi on 30th Jul 2019
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