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A simple bond is a promise to pay a given principal amount at a given maturity time. If you buy the bond for a price that is less than the principal you will realise a profit. The (compound) rate of interest that will make the price grow to the principal between now and maturity is the yield to maturity. The lower the price, the higher the yield and conversely. There are more complicated bonds that pay interest regularly (called a coupon) in addition to the principal at maturity, but they still have inversely correlated price and yield. And a fixed-interest mortgage is like a bond with monthly coupons and no principal.

It should be plain that bonds are completely different from stock shares, which are shares in the capital of a company.

Let's not get into exchange rate risk at this point ;-)

Can the last politician to go out the revolving door please turn the lights off?

by Carrie (migeru at eurotrib dot com) on Tue Jun 19th, 2007 at 10:54:59 AM EST
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