I’m a bit confused by the structure of the T-notes in your examples.
A typical X% bond works like this:
You buy it for $100
You receive $X of coupon every year (T-notes pay a coupon every 6 months)
You receive $100 back in a fixed number of years (for example 5 years)
It doesn’t really change any of the points you highlight in this post: the price of a bond can fluctate, especially if a bank needs to sell a lot of them ; an increase in interest rates will cause the old bonds to decrease in value (you paid $100 for a $1 annual coupon and $100 back, but now the interest rate is 5%, so for $100 you can get $5 every year and $100 in 5 years ; this has to mean that your old bond isn’t worth $100 anymore).
So, I’m curious, why did you choose an alternative bond structure?
I did my math in zero-coupon bonds (pay $100 at maturity, yield is defined by discount to par) because it’s simpler and doesn’t change the analysis. Same reason that I rounded 5%/ann for five years to 75¢/$1.
As you said, it doesn’t really change the point, but I’m here to say it’s not an alternative bond structure, just that the bond happens to be trading at a discount already at the initial conditions. It will trade at a steeper discount as interest rates rise. It would be even less intuitive, but you could also do this analysis with bonds that are trading at a premium (trading at a smaller premium, or even hitting par or switching to a discount, as interest rates rise).
I’m a bit confused by the structure of the T-notes in your examples.
A typical X% bond works like this:
You buy it for $100
You receive $X of coupon every year (T-notes pay a coupon every 6 months)
You receive $100 back in a fixed number of years (for example 5 years)
It doesn’t really change any of the points you highlight in this post: the price of a bond can fluctate, especially if a bank needs to sell a lot of them ; an increase in interest rates will cause the old bonds to decrease in value (you paid $100 for a $1 annual coupon and $100 back, but now the interest rate is 5%, so for $100 you can get $5 every year and $100 in 5 years ; this has to mean that your old bond isn’t worth $100 anymore).
So, I’m curious, why did you choose an alternative bond structure?
I did my math in zero-coupon bonds (pay $100 at maturity, yield is defined by discount to par) because it’s simpler and doesn’t change the analysis. Same reason that I rounded 5%/ann for five years to 75¢/$1.
As you said, it doesn’t really change the point, but I’m here to say it’s not an alternative bond structure, just that the bond happens to be trading at a discount already at the initial conditions. It will trade at a steeper discount as interest rates rise. It would be even less intuitive, but you could also do this analysis with bonds that are trading at a premium (trading at a smaller premium, or even hitting par or switching to a discount, as interest rates rise).