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Greater Toronto Area , ON , L6T 4L9 Canada
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Discussing two very closely related finance indicators


Explaining Yield curve

Unlike the share market when the bond yield goes up the bond price actually goes down. This is in fact in a bit different than what we normally see. Below is the detail explanation of exactly what happens.

Understanding the concept of bond is fairly simple. It is piece of document which promises you to payback your invested principle after the maturity date plus an interest (simple or compound) in fixed intervals. Bonds are not same as stock market shares. When you own a piece of company share then you partly own the company with its risks for as long as you own the stock. Bonds in the other hand have a maturity date and you will get the promised interest on the money and will get your principle back after maturity.

Bond Yield CurveThere are various types of bonds issued by various entities. The include but not limited to – Federal Government, Provincial Government, Local Governments, Corporations etc. Bonds are generally considered very sound investment if issued by a financially sound government. There are cases where a government has defaulted on its bonds.
Bond has few important terms, such as Bond price, Interest rate, Par value, maturity date and finally bond yield. Generally in the mortgage market the most discussed terms are Bond Price and Bond Yields.
Assume you own a bond of 100$ value with a 2 years maturity. The interest rate is 6% per year. So, you will receive total of 12$ (based on simple interest) within this 2 years. Now you want to sell your bond in the middle of the term. You get an offer of 90$ for that bond. The new owner will receive 106$ after one year on an investment of 90$. He/she will earn (106-90)/90 = 17.78% on that bond. That is called bond yield. Hence when bond prices go down yields goes up.

Following are some examples of many types of bonds available in the market:

 

  • Convertible bonds
  • Corporate bonds
  • Eurobonds
  • Extendible/retractable bonds
  • Foreign currency bonds
  • Government bonds
  • High yield bonds
  • Inflation-attached bonds
  • U.S. treasury inflation protected securities (tips)
  • Mortgage-backed securities
  • Zero coupon or “strip” bonds
  • Asset-backed securities

Pros and Cons

Many analysts in the market tend to use the yield curves to predict the future. It is not a very well proven idea. Many times those predictions has missed their targets. It can give you a fair idea about what is coming but not without its drawbacks.

Covered Bond.

As we know bond is essentially a tool or instrument to raise funds for various purposes. In the 2008 market meltdown the bond market took a serious hit. In the Basel-III covered bonds have added security. Covered bonds are backed by mortgage cash flow or public sector loans. If in case the issuer becomes insolvent, the assets assigned to the covered bond can be separated from the other assets and can be used to cover the bondholders. There may be a new legislation in spring 2011 related to covered bonds in Canada.

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About Us

Sudip Adhikari.
Agent License #M10001082
Broker Mortgage Diligent -
Head Office -1305 Matheson Blvd East, Mississauga, ON L4W 1R1
FSCO #10252 O.A.C , E&OE

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