A bond in general terms refers to something that binds, in the world of economics and finance it is said that one is bind to pay a certain amount of money. To be precise, a bond is a security issued by the firm or the government.
Analogous to a loan, it has a creditor which in this dimension is referred to as the holder, and also has a debtor referred to as the issuer of the bond. There is also an interest rate charged, which in this section is referred to as coupon, which is interest payment made on a bond.
This post focuses on identifying the buyers of a bond and sellers of a bond as the terminologies are not plain to comprehend without further elaboration.
Buyers of a bond
Buyers of a bond are referred to as ones who pays a certain amount of money today anticipating to be compensated in the future with interest. For instance, the reader has $1 000 but not using it in the near future, theoretically John needs $500 urgently buy data and gain access to this platform for examination preparation purposes. Since the reader is not using the money anytime soon, lends $500 to John with interest of 5%. The reader in this scenario is the buyer of the bond while John is the seller of the bond (shall explain in detail), as the reader pays John $500 today with the projection of receiving it back in the future with interest. Buying and selling is our daily routine, for instance borrowing your friend your car suppose she wanted to borrow it. For her to use it there have to gas in it, so she will have to take from her pocket her own money and buy gas. Where do you benefit? Presumably she borrowed the car little gas in it, and she after using it she brings it back half or full. Other examples are banks. During recession, where there low is economic growth due to a severe decline in aggregate spending, the Central Bank intervenes by buying bonds from commercial banks and the treasury department, hence under this episode they are buyers of bonds. In an attempt to reboot the down sloping economy, the monetary approach purchases bonds from the commercial banks in the short-run, meaning paying the commercial banks today to avoid things such as bankruptcy, with the hope of getting paid in future. Heeding the current atmosphere in the face of the pandemic, national shutdowns and lockdowns and social and economic response, other nations have called for a ‘zero repo rate’ and the Central Bank purchasing unlimited bonds from commercials banks. However, purchasing unlimited bonds from banks without evaluating their collateral respectively it is a huge risk because there is no longer an assurance the Central Bank is going to compensated in the future, making it a more of a donation instead of a bond.
Sellers of a bond
Sellers of a bond refer s to ones receiving funding today with the hope or assurance they are going to pay it back in the future. Above the focus had been on suppose a country is experience a recession, however now the focus is on a country experiencing inflation. When prices are skyrocketing the monetary policy intervenes by selling bonds to the commercial banks and the government. The tables turn, making the government and commercials banks buyers of bonds, meanwhile the Central Bank the seller of bonds, meaning the Central Bank receives money today pledging to pay it in the future with interest to the government and commercial banks. This is an effort of decreasing the money supply by forcing the commercials to buy bonds from them, reducing the money that was reserved to offer as loans to people, and reduces government spending as a proportion previously reserved for infrastructure program for instance, is now bind to be allocated to buying bonds. Evidently loans will be relatively inaccessible and expensive, and employment from government spending deteriorates, instigating a severe regression of the aggregate demand and price levels.
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