Bonds: what's up with those interest rates?

[jdenhaan]

Hi all,

I'm looking at ASX listed Ausatralian Government Bonds (list here) and I noticed something weird.

What's up with the wildly varying interest rates? For example, the GSBG23 has an interest rate of 5.5%, whereas the GSBG24 has only 2.75%. Why would someone buy the GSBG24? Is it a safer bond? Or is it simply cheaper and do you make your money at maturity / selling time?

 

[Hodgie]

Hi all,

I'm looking at ASX listed Ausatralian Government Bonds (list here) and I noticed something weird.

What's up with the wildly varying interest rates? For example, the GSBG23 has an interest rate of 5.5%, whereas the GSBG24 has only 2.75%. Why would someone buy the GSBG24? Is it a safer bond? Or is it simply cheaper and do you make your money at maturity / selling time?

The bond with the lower coupon rate has a lower market value. It would be valued at a rate where the coupon plus maturity value is equal across the bonds. As market interest rates rise the value of bonds issues at lower coupon rates become less valuable because they now offer below market coupon returns. Falling interest rates have the opposite effect.

 

[notting]

30 year bond bull market is coming to an end.
If it's Yellen you should be sellen they have been sayen.

 

[McLovin]

The bond with the lower coupon rate has a lower market value. It would be valued at a rate where the coupon plus maturity value is equal across the bonds. As market interest rates rise the value of bonds issues at lower coupon rates become less valuable because they now offer below market coupon returns. Falling interest rates have the opposite effect.

Also important to remember that coupon rate will affect price volatility. So a lower coupon bond will have higher price volatility than a higher coupon bond, even though they may have the same YTM.

 

[Hodgie]

Also important to remember that coupon rate will affect price volatility. So a lower coupon bond will have higher price volatility than a higher coupon bond, even though they may have the same YTM.

Yep, good point.

 

[mistersmith14]

Racking my brain for this.

 

[wayneL]

THE END OF CHEAP MONEY or something, was the b breathless headline I saw this morning.

Geez! So 0.25% is expensive eh?

 

[cynic]

THE END OF CHEAP MONEY or something, was the b breathless headline I saw this morning.

Geez! So 0.25% is expensive eh?

It's an infinite percentage increase on 0% !!