Sorry, I might be silly in asking this but is this for the Winter Workshop or Summer Scheme? Thanks 😊
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TCLA Vacation Scheme Applications Discussion Thread 2022-23
- Thread starter Jessica Booker
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The inverse relationship between IR and bond prices still holds. But don't think of the rate of interest as purely that set by BoE. If a bond has a 4% coupon rate, and, for example, there's news that the company might go under/is having financial issues, then people will be less likely to be the specific bond. Its price will go down. A central bank's interest rates should normally not affect this. In the case of the 4% bond, the interest payable will likely increase, as a result of the falling bond price, to entice investors with greater risk appetite to invest in the bond. Hope this helps
Thank you for your response.
So:
(1) the bond price of the 4% bond will still decrease. And what I should take from that is that a bond with a coupon rate higher than the prevailing interest rate (after a rise) does not mean that its price will increase.
(2) "If a bond has a 4% coupon rate, and, for example, there's news that the company might go under/is having financial issues, then people will be less likely to be the specific bond". What did you mean by the latter (in bold) part? Did you mean to say buy instead of be?
(3) " In the case of the 4% bond, the interest payable will likely increase, as a result of the falling bond price, to entice investors with greater risk appetite to invest in the bond". I'm gonna assume that the 4% bond is variable based on what you said. Also, does the interest payable (coupon rate) just increase automatically as a result of the decrease in bond price?
No worries at all Dwight
(1) I used your 4% coupon rate example to explain the underlying concept. But to be more clear, think about the coupon rate of an individual bond to be a calculation of (i) the interest rate set by a central bank, (ii) the risk premium on a specific bond and (iii) market sentiment.
If Amazon issues bonds, it'll be able to get from investors significantly lower rates than other companies. This is because Amazon is a well-established multinational company that has annual revenues in the $100s of billions. Save for unforeseen circumstances, investors are very likely to get their money back. This is reflected in the bond price and coupon rate. A lower coupon rate usually = a lower risk premium.
A central bank's base rate increases may increase the coupon rate payable on a bond (because base rates reverberate throughout the economy), but this is a factor that influences coupon rates, not the sole cause. If Amazon were to become unstable for some reason (e.g., people stop buying stuff online), it'd be a riskier bet, and this would mean that there is a greater likelihood that it defaults on its bond repayments. Investors will be cognizant of this, and will price in a higher risk premium, resulting in a higher coupon rate.
The reason a bond's price usually falls when its coupon rate rises is a supply/demand issue. Riskier bonds attract fewer investors, leading to downward pressure on the bond's price. The riskier a bond, the greater the interest rate payable on the bond to justify holding it, hence an upward pressure on the coupon rate (to account for the greater risk premium). I hope this clarifies my earlier point.
(2) Poor spelling on my part lol. I meant people will be less likely to buy the specific bond. See (1) for a more thorough explanation.
(3) As in (1), coupon rates are affected by central bank rates, the perceived risk premium on the company issuing the bond and market sentiment. Coupon rates are variable, but the aforementioned three factors influence them. The inverse relationship between bond prices and coupon rates is a general rule, not a fixed law.
Hope this helps
i'm just assuming i won't be hearing from skadden until like nov onwards tbh, but yea haven't heard (spring)
To be fair, I have applied for Covington (winter) and I have not heard back from them.
Hi. When did you apply please? And how long did it take for you to get the first interview invite?
In response to the question Please outline your most significant achievement to date and how this was achieved? The example you choose can be from within or outside your academic career. would saying my most significant achievement is "persisting with mooting despite working alone and losing my first moot"? I see this as a huge achievement for me, but I just don;t know how to word it to make it clearer. Any advice is much appreciated !
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