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.

46 thoughts on “Treasury bond prices and yields | Stocks and bonds | Finance & Capital Markets | Khan Academy

  1. Love the 4 minute videos. Perfect for when I don't have time or energy to delve into science or math, I can just kick it and learn about the treasury and hedge funds!

  2. The government needs money for whatever billion dollar projects, departments, and wars they need to finance, so they simply borrow the money from "investors" at interest. What you and I would call a contract for repayment, the government calls bonds. It's just wordplay.
    This puts the government in debt.
    What happens when the investors want their money back and the government is only in MORE dept than before? Either print money (inflation) or borrow to put printing off until later. Unsustainable.

  3. Not necessarily unsustainable. What's unsustainable is having a large debt to GDP ratio. If an economy has growth then borrowing matching that growth isn't really a problem as long as debt to GDP-ratios stay in control.

  4. Rothschild and his Jewish buddies murdered our for-Fathers on the Titanic 1912 that were against the establishment of the FED which gave the Satanist Jews a bottomless Ocean of phony cash to train non-Jewish militarists to go and murdering innocent non-Jewish people all over the world because the lying Jewish Medias labels them Theorists. Support our troops? Using phony money as value of exchange? Phony money that is used to kill all non-Jews? Force your eyes open!!! And do not use phony money as value of exchange!!! See how we are enslaved as Police, Militarists to dance to the Jewish Phony money. Committing genocide to non-Jews is the Jewish aim. Save the children!!!ย 
    And pass it on!!!

  5. Correct me if I'm wrong but I thought treasury bills mature at 1 year or less, treasury notes mature between 1 – 10 years and treasury bonds mature at over 10 years… Why is the title treasury bond and then he talks about a 1 year maturity. I'm confused ๐Ÿ™

  6. Nice, simple explanation. See also –ย https://www.linkedin.com/pulse/t-bill-trajectory-early-warning-signs-public-debt-smith-phd

  7. Hi…i would like to know the "perfect range" that a gov bond say 10Y yield should have for example the US economy?

  8. C4C – stop investing in us bonds. dubai is the present. usa economy is doomed. the new president will surely attempt to stimulate the economy however it will be short lived.
    take a look at what is going on in dubai.
    http://www.nasdaqdubai.com/
    http://www.bloomberg.com/news/articles/2014-04-22/dubai-said-to-plan-sale-of-15-year-sukuk-as-early-as-today

  9. this video was informative but seems to be over complicating things. please someone correct me if im wrong. Forget all the percent and yield information. i give the government 950 and the promise to give me 1000. 50 dollar in profit. what benift do i have of doing this? why would anyone do this am i missing something. please explain thank you because i can make more of a return with a 12 month Cd at a bank.

  10. January 19, 2018: "The threshing floors will be full of grain, and the vats will overflow with the new wine and oil. Then I will make up to you for the years that the swarming locust has eaten, the creeping locust, the stripping locust and the gnawing locust, my great army which I sent among you. You will have plenty to eat and be satisfied and praise the name of the LORD your God, who has dealt wondrously with you; then my people will never be put to shame." Joel 2:25 KATE

  11. wait until these bond yields go to historically normal levels , the govt will have to default on its obligations and there will be to be a restructuring.

  12. I would be grateful if you could upload a video explaining the relationship between the dollar price, yield and gold price. It is very complex and I have failed to understand it.

  13. we just %100 debt/gdp today. i know that swiss is at %127/gdp. the swiss have the gold and the US has the military

  14. This isn't finance, its 2nd grade math. why put stocks in title if it has nothing to do with the correlation between bond yields and the stock market?

  15. Great explanation. Could you apply this to yesterday's event of Treasury bonds massive selling? Seems weird to see that markets fall if bond yields increases.

  16. Lending 950 dollars to get 1000 dollars over the course of 1 year, is a 5% yearly performance, meaning about 0,42 monthly performance. I think that if people want to get into this kind of stuff, they should learn some trading basics, be it FOREX, stocks, futures, whatever. 5% yearly performance is easily achievable even for a beginner.

  17. Not sure how you can acquire 5 percent returns if the govt isnt printing 5 percent more money or the banks arent printing it through lending. Or maybe through FDI. The money could come from taxes. But people hate paying taxes and incomes would fall every year if money was siphoned ever year to pay off foreign banks. It cant come from trade surpluses. america doesnt post any. Cant be from american corporate profits abroad. Because america posts negative current account balances. So I can only imagine the money comes from printing money and foreign investment in exchange for american assets. So this might benefit individuals from foreign countries. But it doesnt benefit foreign nation states. Since the assets are largely useless geopolitically.

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