Understanding Yield and the Effects of Rising Interest Rates

Think of yield as the return provided by a fixed income investment. The yield of a bond is based on both the purchase price of the bond and the interest (or coupon) payments received each year. Yield is often the term used to describe long-term interest rates.

     Yield = Coupon
Bond Purchase Price

Why Rising Interest Rates (and Yields) Push Down Bond Prices

Interest rates and bond prices have an inverse relationship. When interest rates fall, bond prices usually rise and when interest rates rise, bond prices usually fall.

Example
An investor buys a new bond for $1,000 that has a 6% interest payment (yield) earning $60 in interest each year. (This interest payment is generally referred to as a coupon.) If interest rates increase by 1%, new bonds will provide a 7% interest payment, paying investors $70 annually. Because investors will now be able to buy a bond with a higher interest payment (higher yield), not as many people will want to buy the 6% bonds. This decline in demand will cause the value of the 6% bond to fall.

The key point is that a bond’s yield will rise when the value of the bond declines. So when bond yields (or interest rates) rise, it actually means that the value of bonds in general is declining. This is why rising bond yields are generally considered to be undesirable for existing bond investor.

 

Courtesy Trilogy Mtg.

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When the Economy is expanfing to the point of inflation, The Bank of Canada can increase interest rates, making it more expensice for consuners to borrow. This tends to reduce overall spending and slows growth to a more manageable rate. The opposite holds true when the economy is weakening, in this case the Bank of Canasa will reduce rates in an attempt to encourage and boost consumer spending.

 

The primary mechanism the Bank of Canada has to manage interest rates is through the Overnight Lending Rate. This is the interest rate the retail banks earn on the funds they hold on overnight deposits with the Bank of Canada


courtesy of Trilogy Mortgage

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Calgary had a better October sales. That could be becaude of the changes brought down by CNHC, which is more likely than saying that the market has picked up.

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