Five Steps to Understanding a $38 Trillion Bond Market
My name's Robert Bonavito, New Jersey forensic accountant. This video is part of a series of videos where I discuss forensic accounting topics for educational purposes only.
In providing litigation services to clients, it's very important that we have a good understanding of the $38 trillion dollar bond market. I'm going to go into some details about how the bond market and how it works. It's pretty simple. Basically how the bond market works, companies and governments issue bonds and people buy those bonds. When you have a bond, there's a stated interest rate on the bond. There's a coupon, it says 5%, for example. And you take that, it's an actual coupon you have, and it says 5% on it, and usually it has, like, a face value on it of $1,000. And this bond was issued by somebody, let's say they're building an airport or something like that, and people buy the bond and they get 5% interest. What does the government get who issued the bond? Well they get trillions of dollars, let's say for the whole bond issue, to build the airport, knowing that the airport is going to have fees to pay this 5% fee. Now if I own the bond, I bought it, let's say I want to sell the bond. But now, interest rates in the markets aren't 5%, they're 4%, let's say. So I'm not going to give someone a bond that has a 5% interest rate on a thousand dollar bond if the market rate is only 4%. So I'm going to raise...I'm going to lower this here...I'm going raise this to, like, a thousand, like $1,100 and that will make this yield go down. And that will be the new effective rate. So I want to get this bond down to a value where the rate...the yield is 4%. So I have to ask for more or less for the bond depending what I want to do. And that yield, that's why you have yield and you have stated interest rates.
And that's really all that the bond market is telling you. If you look at the bond market, it's going to...whatever the yield is, that's what people are willing to pay for the bond. Maybe they want...maybe this is not enough. Maybe they want 7%. Well then I'm going to have to sell my bond for less than $1,000 and the yield will go up to a 7%. And these fluctuations give you a lot of great information because if you know what's happening, how this effective rate is changing on a bond, on a minute by minute basis, but if you look at it on a weekly basis or a monthly basis, it's going to tell you what's happening out there. Are interest rates...are people feeling good? Are they feeling bad? If they're selling the bonds, that means they're feeling good because they think interest rates are going to go up. If they're buying the bonds, well they think interest rates are going to stay the same. So anyway, understanding the bond market is very important for litigation support services. If you have any questions on this, feel free to give me an email.