Simple Government Bonds Question?
numbaONE!!! asked:
The rates on these bonds change continuously throughout the year, and i have no trouble whatsoever in understanding them.
however, i have one question…
Once a government bond is bought, does the rate of return on it change?
For Example:
If i were to buy into a 10-year Treasury Note at 3.027% today, would that 3.027% remain constant for the entire 10 year period? or does the interest rate fluctuate continuously throughout the period in which i own the bond???
thank you, and if i need to re-word this, please let me know.
ok. this is ridiculous. i got two different answers, from 2 people each. doesnt make sense. can one of you please clarify this all and condense it into something i can understand? because it seems as though you all typed skimpy answers and none of them really agree with each other.
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Tagged With Government Bond, Government Bonds, Interest Rate
Comments
7 Responses to “Simple Government Bonds Question?”
The rate of return changes because the yield changes. Good luck.
If you buy a 10 year T note that yields 3.027%, that will be your return for the life of the note.
There are exceptions to that. H bonds are an exception as the rates change every 6 months I think. Another is TIPs.
If that was the yield when you bought and you hold it until it matures that is the rate you will get. In the meantime the price fluctuates, so the yield fluctuates. So you may get more or less if you sell before maturity.
When you purchase treasury securities at auction the interest/coupon rate is fixed and will remain the same through-out the duration of the asset until maturity.
The rate fluctuations you see are the differences in rates from auction to auction
The 3.027% coupon is fixed. Your rate of return varies with the price of similar bonds.
The contract is between you and the Government. They promised to pay you 3.027% for ten years provided that you leave your money with them. (i.e.non-cashable.) Therefor, it will increase in (paper) value at a rate determined by the applicable interest table.
But if a person owning the same kind of bond as you either wants the cash ahead of time and/or feels that future interest rates are likely to be less than 3.027%, they will offer their holding for sale on the market.
If you have no interest in selling, current market rates are pure noise. Ignore the listings and go back to the interest tables.
Jeff is right. 10 Yr T/Note is a fixed income instrument. If you hold it until maturity you know in advance exactly what cash flow you will receive in the future. (Cash flow is semi-annual interest payments plus full principal at maturity).
The yield, or return on the bond is calculated based on the discounted values of those cash flows, as a percentage of the price that you paid when you purchased the bond. So basically the yield doesn’t change, provided that you don’t decide to sell the bond before maturity date.
If you sell early, all bets are off, because you will get a different cash flow than the one that you used to calculate your original yield.