Fixed income - government bonds: merits - Part 1

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From the course by University of Geneva

Understanding Financial Markets

1831 оценки

University of Geneva

Understanding Financial Markets

1831 оценки

Course 1 of 5 in the Specialization Investment Management

In this course, you will learn what the main financial markets and their characteristics are as well as how they are linked to the economy. Our very diversified team of experts will start by teaching you how the price of stocks and bonds are computed and why they move while you will become increasingly aware of the notion of risk and why it matters when measuring an investment's performance. The focus will then move to less popular markets such as gold, emerging markets, real estate, hedge funds and private markets. These will be analyzed with an emphasis on their particular risks and return opportunities as well as how they can help in building efficient portfolios. Finally, the policies of central banks and their impact on financial markets will be presented to you along with the link between the economy and the price of financial assets. All along these different steps, experts from UBS, our corporate partner, will show you how the concepts you just acquired are effectively applied in a leading global bank. This focus on practicality means you will not only understand what is going on in global financial markets but also start to figure out how you can use them to achieve financial goals, be it a client's or your own.

From the lesson

Major Financial Markets

Fixed income - government bonds: merits - Part 17:52

Fixed income - government bonds: merits - Part 25:55

Fixed income - government bonds: merits - Part 38:56

Fixed income - government bonds: risks11:21

Fixed income - corporate bonds and high yield - UBS guest lecturer5:26

Money markets - UBS guest lecturer6:58

Currencies: a separate asset class?11:57

What is the real value of a currency?17:40

Meet the Instructors

University of Geneva- Ines Chaieb
SFI Associate Professor of Finance
Geneva Finance Research Institute
University of Geneva- Jonas Demaurex
Teaching Assistant
Geneva Finance Research Institute
University of Geneva- Rajna Gibson Brandon
SFI Senior Chaired Professor of Finance and Managing Director of the GFRI
Geneva Finance Research Institute
University of Geneva- Michel Girardin
Lecturer in Macro-Finance - Project Leader for the "Investment Management" specialization
Geneva Finance Research Institute
University of Geneva- Martin Hoesli
Professor of Real estate investments
Geneva Finance Research Institute
University of Geneva- Olivier Scaillet
SFI Senior Chaired Professor of Finance and Vice-dean (research) at GSEM
Geneva Finance Research Institute
University of Geneva- Philip Valta
SFI Assistant Professor of Finance
Geneva Finance Research Institute
Dirk Effenberger
UBS Guest Lecturer, Head CIO Cross-Regional Investment Office
Chief Investment Office, UBS Wealth Management
Mark Haefele
UBS Guest Lecturer, Global Chief Investment Officer
Wealth Management and Wealth Management Americas
Brian Nick
UBS Guest Lecturer, Strategist
Chief Investment Office, UBS Wealth Management Americas
Mike Ryan
UBS Guest Lecturer, Chief Investment Strategist
Chief Investment Office, UBS Wealth Management Americas
Simon Smiles
UBS Guest Lecturer, Chief Investment Officer UHNW
Chief Investment Office, UBS Wealth Management
Themis Themistocleous
UBS Guest Lecturer, Head European Investment Office
Chief Investment Office, UBS Wealth Management
Thomas Wacker
UBS Guest Lecturer, Head CIO Credit
Chief Investment Office, UBS Wealth Management
Chris Wright
UBS Guest Lecturer, Cross-Asset Strategist
Chief Investment Office, UBS Wealth Management
University of Geneva- Tony Berrada
SFI Associate Professor of Finance
Geneva Finance Research Institute

[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]

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