The prices of bonds and interest rates go up and down but in opposite ways. When interest rates go up, the cost of borrowing money goes up, and when they go down, the value of bonds goes down.
At first glance, it doesn’t make sense that changes in interest rates cause changes in bond prices. But when you look at it more closely, it starts to make sense in a very convincing way. Businesses that lend out cryptocurrency used to make a lot of money, but now safer and more common options are making it harder for them to compete. You can visit HomePage if you are looking for a reliable trading platform.
Since May, AAVE’s loan rates on USDC have gone up a lot, while the yields on 3-month Treasury notes have slowly gone up. The interest rates on both products have been the same for the past few months. This means that the return on government debt is now better than the return on debt from companies that are not tied to the government.
Are the benefits more important than the risks?
The annual return on USDC put into AAVE V2 on Ethereum has dropped from 2.4% in the middle of May to only 0.2%, according to data from Bloomberg and Aavewatch. In the same period, however, the return on US Treasury notes due in three months has gone from 1% to 3%.
The Federal Reserve may have much to do with the rise since it has raised yields in every industry except crypto. Still, most digital asset markets follow the stock market, which has gone down because the central bank has put in place tough policies. The price of short-term treasury notes has been going up for a long time because of the same thing.
The yields on AAVE seemed to drop the most from May 13 to May 22. During that time, they went from 2.4% to 0.9%. This happened just one week after Terra went bankrupt, which helped start a big split in the stablecoin lending market over the next few months.
But this doesn’t make crypto lenders any less dangerous. In traditional markets, how much you get paid depends on your risk. In crypto markets, on the other hand, payouts depend on how much trading goes on. DeFi Llama says that the total value of the DeFi protocols has gone down a lot since last year, especially in June.
Bond investors usually look for ways to make the most of their money, just like investors in anything else. To reach this goal, they often have to keep a close eye on how much it costs to borrow money as it changes.
Returns on zero-coupon bonds depend on how much they were bought for, how much their face value is, and how long it will be until they mature. Bonds that don’t pay interest are sold for less than their worth. But even though zero-coupon bonds don’t have coupons, the return is still guaranteed, which may be attractive to some investors.
Bonds that don’t have any forces to hold them together
The rate of return on a bond with a market price of $950 and a face value of $1,000 that will be paid off in one year is currently 5.26 per cent. This can be fixed by doing this: The answer is 5.26, which equals 100 times 1,000 minus $950. To put it another way, a person who bought this bond for $950 would have to be happy with a 5.26 percent return.
This happiness does, of course, depend on what else is going on in the bond market. If current interest rates went up and new bonds gave a 10% return, the 5.26 percent zero-coupon bond would be a much worse investment. Who would be happy with a return of 5.26 percent when they could get 10%?
Now that we know how interest rates affect the price of a bond, it’s easy to see why if interest rates went down, the bond price would go up. If interest rates went down to 3%, our bond with no coupons and a current yield of 5.26% would look very good. More investors would buy the bond, raising the price until the yield was the same as the standard rate of 3%. In this case, the $1,000 face value of the bond would cost almost $970.87 more.
Coupon rates on newly issued bonds are usually the same as or higher than the standard national interest rate. This is done to get investors’ attention.
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