Fixed, floating or inflation linked? - YouTube

A fixed-rate bond, pays a fixed return for the life of the bond and is set at the

time of the issue.

Hence, the rate of coupon is locked in, and will not change over the term

of the loan.

They are similar to term deposits.

The interest you receive is set.

There is one key difference though,

bonds are trade-able securities.

Because of this,

fixed-rate bonds have an inverse relationship to interest rates.

If interest rates rise,

the the price of the bond falls.

Alternatively,

if interest rates fall,

then the price of the bond rises.

This is because the only way that bonds can reflect changes in the market's

expectations of interest rates

is through price movement.

Important to know,

when you buy a bond,

the value of that fund may fluctuate

however this does not affect the coupon rate.

Let me give you a simple example,

if you held a fixed-rate bond and it paid a coupon of 6%,

and current interest rates were 4%

than the market would value that bond more

because it is paying 2% above that current interest rate of 4%.

Alternatively,

if interest rates begin to rise and they rise above the coupon rate of 6%

then that fixed-rate bond would decrease in value.

Nevertheless,

if you hold the bond to maturity

you will receive your hundred dollar face value.

Floating-rate notes, pay a coupon that's linked to a variable benchmark.

the benchmark is the 90 day bank-bill swap rate.

BBSW for short

and it's just simply the bond market's cash rate.

The margin over the benchmark is fixed,

and it said at the time of issue

this is also known as a coupon.

The coupon rises and falls over time,

this is because

the bank-bill swap rate changes daily.

it is the market's view on interest rates

let me give you an example

if the market believes that interest rates will increase in the near future

then the bank-bill swap rate will also increase.

if the market believed

in the future, that interest rates were going to fall

then the bank bill swap rate will also begin to fall.

the key difference here is that floating-rate notes

have much less interest-rate risk

and this is because

their coupon rates

increase and decrease with the market's expectations of interest rates.

inflation-linked bonds are securities that are linked to the consumer price index

or inflation.

the most common type

is the capital index bond

the capital index bond has a fixed coupon and it's usually quite low

usually between two and three percent

however the principal is linked

to inflation

each quarter the principal component increases with headline inflation

the coupon is then multiplied by the increased

principal component

let me give you an example

if you bought a capital index bond for a hundred dollars and the coupon was 5%

and inflation for that year was ten percent,

than the value of over that year will be increased to one hundred and ten dollars

you would then multiply the 5% coupons

increased principal component of a hundred and ten dollars

which would then give you a rate of $5.50

hence not only is your principal increasing with inflation year-on-year

but so is your income.

So in summary,

we have fixed-rate bonds

that pay a fixed rate over the life of the bond and price is mainly affected by interest rate movements.

We have floating-rate notes

which move in line with the bond market's cash rate,

and finally,

we have inflation-linked bonds,

where your principal and income, keep pace with inflation.