Price federal loan bonds and their yield are two key indicators that are interrelated, but at the same time they have their own meaning. To explain the difference between them, let's look at a simple example.
Imagine that you decide to invest in an OFZ with a nominal value of 1,000 rubles, which provides a fixed coupon income of 100 rubles per year. This means that you will receive 100 rubles every year.
OFZ price and profitability
- Initial price: If you buy a bond for 1000 rubles, your yield (yield to maturity, YTM) will be 10% (100 rubles of the coupon divided by 1000 rubles of the price).
- Price reduction: Let's say the market price of a bond drops to 900 rubles. If you buy a bond at this price, then your annual income will still be 100 rubles, but now your yield is changing. The new yield will be: Yield = 100 rubles (coupon) divided by 900 rubles (new price) approximately 11.11%
- Price increase: If the bond price rises to 1100 rubles, your yield will change again: Yield = 100 rubles divided by 1100 rubles approximately 9.09%
Nominal value of OFZ
When the government issues federal loan bonds (OFZ), it sets their nominal value, which is usually 1,000 rubles. This nominal value is used to calculate coupon payments. For example, if a bond has a coupon rate of 10%, then you will receive 100 rubles per year (10% of 1000 rubles).
Why can the bond price change?
The price of bonds on the market may change after they are issued for various reasons:
- Changes in market percentages: If interest rates rise in the economy (for example, banks start offering higher ones deposit rates), new bonds are beginning to offer more attractive yields. This may lead to the fact that an old bond with a fixed coupon (for example, 10% of 1000 rubles, that is, 100 rubles per year) becomes less attractive. As a result, its market price may drop to 900 rubles.
- Credit risk change: If the market starts to perceive the government as riskier, this may also affect the price of bonds. If investors start to think that the government may not pay off its debts, the price of bonds may fall.
Example of a price change
Let's say you bought an OFZ for 1000 rubles and get 100 rubles a year. If market conditions change and the price of the bond drops to 900 rubles:
You will still receive the same 100 rubles per year, because the coupon payment is linked to the nominal value.
But your yield (that is, your income relative to the amount you spent on buying the bond) will increase. Now you can calculate your new profitability:
New yield = 100 rubles (coupon) divided by 900 rubles (new price) approximately 11.11%.
Thus, even if the price of the bond in the secondary market changed, your coupon payments remained fixed. This creates a relationship between the price of a bond and its yield: when the price falls, the yield increases, and vice versa. I hope it's clearer now!
When the price of bonds in the market falls, their yields rise, and vice versa. This relationship is one of the key aspects of the bond market, which attracts investors to this market.
Investing in OFZ can be an interesting way to earn fixed income, however, it is important to closely monitor price changes in the market, as this affects your profitability. When the market situation changes, the ability to analyze price fluctuations and predict future earnings can significantly affect your investment success.
