Capital Gains on a Bond? Really? How does that happen.

Robin Kingsmill - Aug 15, 2022
Did you know that the Bond Market is huge? It is 10 TIMES bigger than the Stock Market...

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Did you know that the Bond Market is huge? It is 10 TIMES bigger than the Stock Market

But you do know that since the Bond Coupon is fixed, it is the Trading Price of a Bond that will change. It will move to reflect changes to the going interest rates. The ‘rules’ of the Bond Market are different to that of the Stock Market; it’s all about the interest rates and math. 

  • Interest Rates and Bond Prices work in opposite directions
  • The higher the Interest Rate the Lower the Bond Price
  • The lower the Interest Rate the higher the Bond Price
  • Gain + Coupon = End Yield

And there‘s the key: If you hold the contract of a bond with a high Interest Rate, and the going rate goes down, you will be able to sell that Bond at a profit. Look at the opportunity for a significant CAPITAL GAIN when / if the current going rate goes down again. AND, is it icing on the cake if that bond could be purchased at a discount? Do I see a light bulb going on?

 

Royal Bank of Canada Bond

30 May 2027 / 31

Current Yield 4.584%*

(*Yield as of July 27, 2022 and subject to change)

This bond was issued at $100 and now is trading at $95 /100

 

How can this give us an opportunity to make more than the 4.584% ?

By selling at a premium If the going rate falls to say 2%, then this bond would trade at $104/100 – a clear opportunity to sell at a profit and realise a capital gain "

  • This has happened before
  • It is not out of the question, as it is very possible that governments have over reacted and moved the rates too high and will proceed to drop them
  • Bonds can be bought and sold on a daily basis. A capital gain looks pretty darned good, as the Market may push the selling price higher than this discounted price.
  • At least, the bond will mature at its par value: $100. " Love that comfort of the bond contract!

They used to call me The Bond Queen! Here we go again! Call us, let’s talk.

 

 

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