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Hannah (Student) December 4 2016
Hannah (Student) November 20 2016
A bond or a gilt is a way of borrowing money for corporations or governments. For example, if an imaginary government wanted to borrow $100, it could issue a single bond, and an investor could buy that bond for that price on the condition that the government will pay, say, interest of 5% of the face value of the bond for 5 years, meaning the investor will receive 100*5%=$5 for 5 years. After the 5 years have passed, the government will repay the original $100 to the investor.
In the example above, the yield of the bond is the same as the interest, i.e. 5%, if we assume that the bond's value remains constant at $100. However, in the real world, bonds are traded in the open market between investors, who have many alternative investment opportunities available, for example putting their money in a savings account instead of buying a bond. For this reason, the market value of bonds’ changes with time, e.g. if previously the government bond cost $100 and paid 5% of its original value ($5), then after some time the bond could be priced at $80, but the amount it would pay to the investor would be the same, i.e. $5. Therefore, the yield of the bond has changed from $5/$100=5% to $5/$80=6.25%, in other words, falling bond prices result in higher yields.
Recently the UK government bond yield has increased, which means that the price of UK bonds has dropped, signalling lower demand for UK bonds. This is thought to be a bad thing because this price drop followed Theresa May’s speech about ‘hard Brexit’, meaning foreign investors’ confidence in the UK economy has dropped due to leaving EU and they are afraid that the value of the pound will drop further because of this, so they are investing elsewhere instead of buying UK bonds.see more
When I initially met this problem, I was slightly confused because of the car analogy above. So the way to think about this is that your body and the car are separate, and just as the car starts going around the corner, your body wants to move in a straight line. However, you’re stopped from going in a straight line by the car’s door or by friction with the car’s interior (depending on where you’re sitting), so even though you may feel that you’re pushed outwards, the net force is actually inwards, resulting in you doing centripetal motion.see more