Hey, what's going on, i'm bond jump on pew pew, i'm kidding my mom actually named me matt, and i've been going by that ever since recently, the term bond has been very popular in stock market, related news beyond being a secret agent who has a license to Kill bonds are a very important part of present-day businesses. In fact, they are so important that they are part of the reason why the market has been going up. Despite horrible economic news, a record 20.5 million jobs were lost in april, as the unemployment rate jumped to 14.7 gdp. Predictions are dismal.

The list of negative news reports seems to be endless, yet the stock market doesn't seem to mind counter-intuitively. The market has been trending upwards. Despite the chaos now, i personally believe that there are various things at play which are causing this abnormal reaction to properly decipher all of it. It would take hours of in-depth discussion so to make this a little bit more palatable.

Let's focus on one key part in this video. I will be explaining what bonds are, what the fed is doing with bonds and why it should matter to you in the first place. A bond is a loan that is made from an investor to a borrower. You can think of it as a fancy iou.

These fancy ious are used by companies, municipalities, states and even the federal government. You might be thinking great, but why would anyone buy a bond off a company or whatever else i just listed? The answer, which isn't surprising, is money. Let me explain how it all works to you with a quick example. Let's say you have a friend named george, who owns a banana stem business.

One day george tells you that there's been an accident and he needs some money to get his business back to where it should be. Since george is a businessman, he tells you he will make it worth your while by promising to pay you back in three years and giving you five percent interest on your money each year. Until then, because you believe in the new banana stand, business and george always hit the like button for you. You accept the terms and give them the loan.

In reality, companies, municipalities, states and even our nation have their own version of a banana stand. Whether they are trying to expand operations, fix roads, build schools or arm a military money is needed, and one way to raise money is by selling bonds. People are enticed into buying bonds because they receive interest payments each year until the maturity date. When the bond fully matures the initial loan would be repaid, it's a win-win.

You make a profit off of loaning your money and the borrower is able to utilize your money. In the meantime, to achieve their goals, it's a perfect system right. Let's say that three years have passed since you loaned george the banana stand money. If everything went according to plan, you would have received interest payments each year and you would have gotten your initial loan back at the end.

But if the banana stand business didn't do well, george might not be able to repay you the principal amount. This is known as defaulting, and it means you might not get your money back. This risk is present in real bonds too. This might make you think that you should only buy bonds from what you consider to be the safest borrowers.

There is a catch, though, in the world of bonds there's a rating system that represents the likelihood of you getting your money back. If the rating of a bond is of high quality, you would profit less in interest payments. On the other hand, if the chance of you getting your money back is a little bit more questionable, you would receive higher interest payments in a sense you're being paid to take a larger risk, as with many things in the world of finance, the higher the risk. The higher the reward - i should mention that there are many factors that go into pricing a bond and computing its associated interest rate, but in general, the two values move in an inverse manner, as the price of a bond goes up, its interest rates drop when the Cost of owning a bond goes down.

Each interest rates go up. Essentially it's all a mathematical balancing act. Now that you know what bonds are, let's discuss, what the federal reserve has been doing and why it's such a big deal in march, the fed made a historic move by announcing it would be financing the purchase of corporate bonds, including junk bonds, junk bonds or high Yield bonds are considered to be higher risk investments, as in there's a higher chance of default. For those who decide to take the risk, the reward is more profits.

Moody's, standard and poor's and fitch are the three rating agencies. If they feel that the quality of a bond is below investment grade, it is considered to be a junk bond you might be thinking. Is it smart for the fed to be investing in junk bonds? That's a great question, but the answer is different from person or person. I simply want to point out that they're not considering all jump bonds.

This new program is open to fallen angels. A fallen angel is a corporation that was of investment grade quality before all of the craziness and only recently dropped into junk territory. The prerequisites don't stop there, though. The companies can be rated no lower than a double b minus when the bonds are purchased.

Beyond the questionable quality of the bonds, critics argue that the fed shouldn't be able to buy corporate bonds. To begin with, the federal reserve act prohibits the buying of corporate assets to circumnavigate this. The fed set up, what's called a special purpose vehicle to do the buying. Put it this way, let's say that you're legally not allowed to own a banana stand business for whatever reason, but you really want to help george, you can make your business give george the loan he's happy because he got the money and you're happy because you own The thing that gave him the loan aren't loopholes fun.

My silly example aside, there's legitimate worry about the precedent that these actions set. The fed's balance sheet was never properly handled from 2008 and it recently hit record highs. The concern is that we're in a perpetual cycle of relying on bailouts to keep our economy functioning besides, overstating the robustness of our economy, it's creating an environment where hyperinflation is more likely on the flip side, people need jobs and money to survive. All of this is a very complex issue and i'm personally very happy i don't have to make the decisions i just wanted to share my understanding of the current state of things.

Did i miss anything? Let me know in the comments below if you enjoy this type of content subscribe for more. I truly appreciate the support. I hope you have a good one. You can call me bond junk bond secret agent man.

I need more friends. You.