- April 16, 2021
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Context: India’s 10-year yield spikes as RBI bond-purchase results disappoint
- Bond is an instrument to borrow money. A bond could be floated/issued by a country’s government or by a company to raise funds.
- The yield of a bond is the effective rate of return that it earns. But the rate of return is not fixed; it changes with the price of the bond.
- Generally, investors purchase the bonds at their face value, which is the principal amount invested. In return, investors typically earn a yield of a bond.
- Each bond has a maturity date, which is when the investor gets paid back the principal amount
Factors affecting the yield:
- Monetary policy of the RBI (interest Rates), fiscal position of the government and its borrowing programme, global markets, economy, and inflation.
- A fall in interest rates makes bond prices rise, and bond yields fall.
- Rising interest rates cause bond prices to fall, and bond yields to rise.
- So, a rise in bond yields means interest rates in the monetary system have fallen, and the returns for investors have declined.