Treasury bond prices and yields | Stocks and bonds | Finance & Capital Markets | Khan Academy

Treasury bond prices and yields | Stocks and bonds | Finance & Capital Markets | Khan Academy


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 piece of paper will be paid $1,000 in one year. So if you buy this
from the Treasury– or 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 $950, and the government will give you
this security right over here. Now 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 holder of the
security will get $1,000. So at this point,
the US government has to give you $1,000. So when you look at
just the money flows, it’s pretty clear that
you just lent them money. You gave them $950 now,
and then a year later they give you $1,000. 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 $950,
and you got back $1,000. So let’s think about this way. Let’s get a calculator out. So 1,000 divided by 950 is
equal to 1.05– and just to round it– 1.053. So you got 1.053– or
105.3%– of your money back. So let me put it this way. So this is 105.3% of money
lent, of money given, of money given to
the government. Or another way to think about
it is, you got a 5.3% interest– or you lent your money out at
an annual interest of 5.3%. You got your money back, plus
you’ve got 5.3% after one year. So you could imagine, if
all of a sudden many people want to buy this
government security, and now the price goes up. Instead of being $950, let’s
imagine that it is now $980. What is the implicit yield that
the person would now get on it? Well, we get the
calculator back out here. So you’re going to
get $1,000, and if you paid in $980 instead of
$950, then a year later when you get the $1,000
back, that will only be 102% of your money. So in that situation it
would be 102% of your money. So with the $950 price,
you’re essentially lending the government
money at 5.3%, and at $980 you’re lending the
government money at 2%. And I’m doing this
to show you a point. When the price of
the treasury security goes up, as happened in
this case, the yield– the interest– that you’re
getting on your loan goes down. Because in either
situation you’re going to just get $1,000 back. If you lend $980
and get $1,000 back, you’re only getting
2% on your money. If you lend $950 and get
$1,000 back, you get 5.3%. And so this is what
people are talking about when they say 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.