Bonds: rate, term and why their price goes up and down
A bond is a loan with a payment date and interest. If market rates change, so does its price. Understanding that relationship avoids surprises.
A bond is a loan you make to a government or a company. In return, the issuer pays you periodic interest (the coupon) and returns the money lent (the face value) on a date (the maturity). CETES are a special case: they pay no coupon and are bought at a discount.
The parts of a bond
| Term | What it is | Example |
|---|---|---|
| Face value | What you get back at maturity | $100 |
| Coupon | The interest paid, as a % of face value | 8% a year: $8 per bond |
| Maturity | When you get your money back | In 3, 10 or 30 years |
| Price | What it's worth in the market today | $95, $100 or $105 |
| Yield to maturity | What you earn per year if you buy today and hold it | 10% if you bought it cheap |
Why the price moves
The golden rule: when interest rates rise, the price of existing bonds falls, and vice versa. The reason is simple: if new bonds pay 10% today, nobody will pay $100 for an old bond paying 8%. Its price falls until its yield is similar to the new ones.
The longer the term, the more the price moves with rate changes. That sensitivity is called duration. A 10-year bond with an 8% coupon would fall to about $88 if rates rise to 10%, much more than the 3-year one.
Mexican government bonds
- CETES: short term, at a discount.
- Bonos M: fixed rate, pay a coupon every 182 days, with terms of 3 to 30 years.
- Udibonos: in UDIS, they protect against inflation; they pay a real rate.
- Bondes: floating rate, adjusting with the market's reference rate.
Corporate bonds
Companies also finance themselves with bonds (in Mexico called certificados bursátiles, or CEBURES). They pay more than the government because they're more likely not to pay. Rating agencies (such as S&P, Moody's, Fitch or HR Ratings) give them a grade: "AAA" is the safest; low grades pay more because the risk is higher.
| Risk | What it means | How it's compensated |
|---|---|---|
| Interest rate | If rates rise, the price falls | Long terms move more |
| Credit | The issuer doesn't pay | Higher rates for riskier issuers |
| Inflation | Inflation eats the return | Udibonos or short terms |
| Liquidity | You can't sell quickly at a good price | Higher rates for thinly traded bonds |
Bond funds and ETFs
Buying bonds one by one can be complicated. Many people use debt funds or bond ETFs, which pool hundreds of bonds. Unlike an individual bond, a fund has no maturity date: its price goes up and down all the time with rates.
Test what you learned
1. If market interest rates rise, what happens to the price of a bond you already own?
- It rises
- It falls
- It doesn't change
Show the answer
It falls. New bonds pay more, so the old one has to get cheaper.
2. Which Mexican government bond protects against inflation?
- Bonos M
- Udibonos
- CETES
Show the answer
Udibonos. They're in UDIS, which rise with inflation.
3. Why does a corporate bond usually pay more than a government one?
- Because it's more likely not to be paid
- Because it's shorter
- Because it pays no taxes
Show the answer
Because it's more likely not to be paid. Credit risk is higher, and it's compensated with a higher rate.
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Everything in this section is educational: it explains how investing works, it doesn't tell you what to buy.