[MUSIC] Hi, everyone. Today we're going to have a look at Fixed Income securities, or what we call government bonds. There are also other types of bonds, but today we're going to concentrate on bonds which are issued by the government. And in this first film we're going to have a look at why, how they work first, what they are, and why they are attractive. On this first image you see a picture that we have of a government bond which was issued during the second World War around the 1944 or something. So you see here already, the main idea of this government bond is a piece of paper issued by the government. And the idea is that to get some money in exchange for this piece of paper. And basically it's debt issued by the government to pay for its expenses. So but we're going to come back on the details of how it works. What you will be learning from this video, the outcomes is you'll be able to explain what a government, or also what we call a sovereign bond is, or public bond. You will know the benefits of investing in such government bonds. And in another video the disadvantages of doing so. So you will also find out what are the main things you should look at when you want to analyze a bond, what we call the coupon, the capital, the principal, the maturity of the maturity. And you'll be able to grasp there's a subtle difference, and we'll illustrate this in a lively way, between maturity and duration. And last, but not least and this is a common mistake which is done very often. Not just by my students, but also people I talk to. When I talk about finances there's a lot of difficulty in understanding why the price of a bond moves in the opposite way as the yield. You'll understand what I mean when we come to the point. What are bonds? Where do they come from? They come from very ancient times actually. The first [LAUGH] bond were issued by the Greeks, yes. It seems like Greece was involved in, so far as the public finances goes in debt for many, many, many years. We're talking about the times prior to Jesus Christ. A government faces expenditures, and these expenditures need to be financed by taxes. So if these taxes fall short of their expenses, then this goes into a deficit. And the deficit in one year, if next year we have another deficit, then the two deficits combine to make a debt. So the debt is just an accumulation of deficits, and basically you cannot accumulate this debt for infinity. At some point you need to finance. And this is where the government issues this piece of paper and basically comes to you as an investor and gives you one piece of paper in exchange for your money. So basically, to finance the debt, the government will issue bonds to many lenders, and a government bond is just a debt security which is issued by the government to support its spending. Most of the times it is issued in the country's own currency, so we have, for instance, US Treasury Bonds, and they are typically issued in US dollar. Importantly you're lending money to a government. What do you get in exchange for that. We'll see what the financial merits that they are in doing so. But basically you're giving this money to somebody and in exchange is just giving his faith that he will be able to pay back the money you lent to him. So that's the general idea of a government bond. And it's known typically the idea that it's secure, it's not a risky type of investment. Because government normally do not default. So they're always able to payback their debt. So when you talk about the benefits of investing in a bond you, as an investor, what you get is a predetermined, so you know in advance, when you invest in the bond, what you're going to get in terms of revenues. So you get all the stream of the different revenues that you will get from investing in a bond. Including the refunding of your capital at the end. At the maturity of when the bond matures or when we reach maturity. So as an investor, when the bond reaches maturity you get your capital, which we also call the principle back. This is the main merit of investing in a bond unlike equities, equities typically or normally you can lose all your investment. You buy a share of US company or European or in emerging markets. You may go up but it may also go down. We see this in other courses. Here, with the bond, the idea is that you get your money back when the bond met yours. Other benefits attached to this investment is the fact that as I said the low risk. Indeed, we will see that they are just a bit more risky than money market investment. And why is this? The probability that the government, which has issued this debt, is unable to refund, to repay the money that he has received from you, is typically low. So that's why we talk about this as a main benefit in investing in government bonds. So you see this on the scale. We know in the finance, there is this idea that there's no such thing as a free lunch. And they could even find people at some point wearing these t-shirts and it had this acronym Tansf, T-A-N-S-F [INAUDIBLE], there ain't no such thing as a free lunch. Tansf. And what's the idea here? Is basically if you want to get more return, you will need to take more risk. That's the main idea of this. There's no free lunch in finance. So you see this on the scale. Low risk, low reward. High risk, high reward. So you see this on the scale. You see the cash, low risk, but also low reward. And then you see immediately after the cash you see the government bonds. Government bonds are slightly more risky than cash. But still, the risk is low, and the reward correspondingly low as well. A bit higher than cash normally, but not as high, normally, as some equities investment which we see on the right of the scale, which typically are more risky, but also should yield more reward in compensation for this risk. [MUSIC]