Unit 3 · Level 2 · Bonds & the boring half
Bonds, reviewed
Bonds are loans with price tags. Yields up, prices down: that's the see-saw. Duration says how hard the swing hits: long bonds at the far end, short bonds by the pivot. 2022 proved 'safe' isn't 'static' when rates launch off zero. And credit risk asks the eternal question: who exactly are you lending to, and why are they paying you so much?
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What you get asked
Match each unit-three concept to its essence
Four ideas that decode nearly every bond headline you'll ever read. The boring half is only boring until you skip this unit.
Rates rise 1 percentage point. Which fund suffers most?
Duration 18 means roughly −18% from a 1-point rise; duration 2 means roughly −2%. Same asset class, wildly different rides. The far end of the see-saw is no place for short-term money.
A bond fund with duration 10 falls roughly ___ if rates rise 1 percentage point.
Minus duration times rate change: −10 × 1 = about −10%. One fact-sheet number, and you can estimate the damage before it happens.
You want bonds specifically as a cushion against stock crashes. Which fits the job best?
In most stock crashes, quality government bonds hold up or rise while junk falls with equities. Chasing the highest yield buys you back the exact risk you were trying to escape.
After 2022, what's the fair, honest verdict on bonds?
Bonds remain the portfolio's shock absorber and income source; 2022 just reminded everyone that shock absorbers have limits, especially starting from zero yield. Respect the see-saw and it will mostly serve you well. 🐜
The rest of this unit
The see-saw of yields and prices, and the year 'safe' fell double digits.