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Current time:0:00Total duration:3:47

Treasury bond prices and yields

Video transcript

when you buy a US Treasury security you're essentially giving a loan to the US federal government and just as an example here I have a US Treasury security in which it says that the owner of this this piece of paper will be paid one thousand dollars in one year so if you buy this from the treasurer maybe you're buying it from someone else but let's just say that the government is issuing them right now let's say you buy it for let's say you buy it for nine hundred and fifty dollars and the government will give you will give you this security right over here now fast forward fast forward one year fast forward one year you're holding this security and what happens so you know all that stuff is written there what happens a year later well written on the security and I've simplified it just for this example it says the old the holder of the security will get a thousand dollars so at this point the US government has to give you has to give you one thousand dollars has to give you one thousand dollars so when you look at just the money flows it's pretty clear that you just lend the money you gave them nine hundred fifty dollars now and then a year later they give you one thousand dollars and if you wanted to put this in terms that you normally associate with borrowing money in terms of how much interest did you get well you lent nine hundred fifty dollars and you got back a thousand so let's think about it this way let's get a calculator out so one thousand divided by nine hundred and fifty one thousand divided by nine hundred and fifty is equal to 1.0 five just to round at one point oh five three so you've got one point oh five three or one hundred and five point three percent of your money back so let me put it this way so this is this is one hundred five point three percent of money lent of money given of money given to the government or another way to think about it is you've got a five point three percent interest or if you you you lent your money out at a annual interest of 5.3 percent you got your money back plus you got five point three percent after year so you could imagine if all of a sudden many people want to buy this this government security and now the price goes up instead of being nine hundred and fifty dollars let's imagine that it is now nine hundred and eighty dollars what is the implicit yield that the person would now get on it well we get the calculator back out here so if you pay so you're going to get a thousand dollars and if you pay it in nine hundred eighty instead of nine hundred fifty then a year later when you get the thousand dollars back that'll only be a hundred two percent of your money so in that situation it would be one hundred and two percent of your money so when the nine hundred fifty dollar price you're essentially lending the money the government money at five point three percent and at nine hundred eighty dollars you're lending the government money at two percent and I'm doing this to show you a point when the price of the Treasury security goes up has happened in this case the yield the interest that you're getting on your loan goes down because then I either situation you're going to just get a thousand dollars back if you land nine hundred eighty and get a thousand dollars back you're only getting two percent on your money if you lend nine hundred fifty and get thousand dollars back you get five point three percent and so this is what people are talking about when they say if Treasury prices go up if Treasury prices go up then the yield goes down so if there's more demand for Treasuries the interest rate on Treasuries will go down in the next video we'll talk about how this might change for Treasuries of different maturity dates