30–Year Japanese Government Bonds Yield at Record High

Answer the following questions to check your understanding of the story.

1) What is a bond yield?

A bond yield is ____________________.

a) the nominal interest rate earned by the buyer of the bond minus the inflation rate

b) the value of the coupons that the buyer of the bond receives

c) the fixed interest payment received by the buyer of the bond divided by the face value of the bond

d) the fixed interest payment received by the buyer of the bond divided by the bond’s market price

Wrong! - How is the bond yield related to the interest payment received by the owner of the bond?

Correct! - The bond yield is the rate of return on the bond, which equals the fixed interest payment received by the buyer of bond divided by the bond’s market price.

2) What determines the government bond yield?

a) It is decided by the government when the bond is issued.

b) It is decided by the central bank when it buys and sells government bonds in the open market.

c) It is determined by the supply of and the demand for government bonds.

d) It is decided by chartered banks when they buy government bonds from the central bank.

Wrong! - Does the issuer of the bond, the central bank or the chartered banks determine the bond yield? Isn’t there a market in government bonds?

That's Right! - The supply of and demand for government bonds determines the price of a bond, and that price determines the bond yield. The higher the price of a bond, the lower the bond yield.

3) Why might the Prime Minister’s resignation make the government bond yield rise?

a) Japanese investors will sell their foreign assets and buy more Japanese government bonds.

b) Investors expect the Bank of Japan to lower interest rates.

c) Investors think the new government will implement tighter fiscal policy.

d) Investors expect looser fiscal policy and an increase in the issuance of government bonds.

Wrong! - The bond yield rises when the price of the bond falls. What would create a fall in the bond price?

Well Done! - Looser fiscal policy means an increase in government spending and an increase in the issuance of government bonds to pay for the increased spending. The price of a government bonds falls and bond yield rises.

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