Marathon Gold Corp MGDPF

RE:RE:RE:What's Going Wrong With Gold Futures?

[AlwaysLong683]

NLMoose wrote:

Actually, Bond yields don't change when interest/market rates go up.

In fact, when interest rates go up, your bond yield doesn't change as its determined based on its coupon rate at the time of purchase.

For example, if you buy a 10 year $100,000 bond with a coupon rate of 5%, your annual bond yield is $5,000.

If the market rate increases to 8%, what happens to your bond yield?  It remains the same at $5,000 per year.  Since bonds use Simple Interest as opposed to Compound Interest, its yield remains the same, making it less attractive when inflation rates are high.

In addition, when market rates go up, the present value of that bond also goes down, meaning that it could be sold at a discount.

However, if the market rate is 3%, the bond yield per year is still $5,000, but the present value of that bond goes up, meaning it could be sold at a premium.

Because Bond Yields don't change, and you're not paid Compound Interest, Bonds and Treasuries are not an attractive investment compared to a safe haven like gold.

The amount of interest you receive (numerator) doesn't change, but the value of the principle of the bond will be worth less than the $100,000 you paid for it unless you hold it to maturity.

Using your example, if you hold a 10-year $100,000 bond that pays a 5% yield and has say, 7 years left to maturity, you'll get the 5% yield and your $100,000 principle back in seven years' time.

However, if you wish to sell that bond before maturity and interest rates have risen such that newly-issued $100,000 bonds are paying 7%, potential buyers would rather buy a $100,000 bond with a 7% yield than your $100,00 bond paying only 5% for a bond of equal risk unless you are willing to sell that bond for less than $100,000 so that the denominator is less and the buyer gets around the same 7% yield that he can buy new bonds for.

That's why rising interest rates and bond prices have an inverse relationship: The more interest rates rise, the less the market is willing to pay for existing bonds.

The reverse is true for falling interest rates. If you hold a $100,000 bond paying a 5% yield and interest rates on new bonds fall to 4%, your bond will increase in value if you wish to sell it since it pays a higher yield than newly-issued bonds.