Question about bonds

alan4cult

Hi,

Can somebody explain this me as I'm confused?

When they talk about the yield on government 10 year bonds, say in the UK, how can they give a yield when no bond is due to be paid in exactly 10 years time?

For example there is no UK gilt due for payment on exactly 24 November 2021 but yet I can look up 10 year UK bond yields on Bloomberg?

Is it perhaps calculated from bonds that have a maturity of 10 years +/- a few months?

Thanks

SBWife

A benchmark bond is defined and the yield to maturity calculated based on that bond. It's normally the latest issue of the given maturity as this will have the greatest liquidity.

nesf

It factors in in the second hand market. Say you buy a bond for 100 Euro that pays 10 Euro a year and sell it to me for 50 Euro. The initial interest was 10% but the second is 20% so the yield on the bond would be 20% as per the market.

What the market yield shows is what interest rate people want to be paid for holding the debt of a country. It drops when there's a lot of demand for a country's debt and rises when there isn't enough demand to meet supply. E.g. Greek bonds are in excess of 20% at the moment if I remember correctly, so if you were trying to sell a Greek bond that you took at a 5% interest rate back during the boom for 100 Euro, you'd only get 25 Euro for it now and so on.

alan4cult

I understand how the yield is calculated but it's just how it relates to the term

Right now there is no UK gilt due for payment in exactly 10 years from today.

There is one payable in March 2022 and September 2021.

So I'm just wondering how they calculate an exact yield for 10 year terms.

SBWife

They calculate the YTM on the benchmark bond which is the IRR on that particular issue.

The March 2022 is not a 10 year bond, it's a 12 year issued in March of 2010.

I've already explained the benchmarking convention above.

alan4cult

Ok thanks SBWife!