Most of the times we remain from where we started. The rich get richer and the poor get poorer. Obviously the question that arises is what does it take to graduate from middle class to rich class? There are no simple answers here, but one of the first things that come to the mind is the language of money.
Till the time we don't understand money's language, we just cannot master the art of making and preserving money.
As mentioned in the previous article (http://getahead.rediff.com/slide-show/2009/may/15/slide-show-1-understanding-the-language-of-money.htm), we will focus on understanding market terminology, so that we will be able to analyse the developments ourselves and thereby reduce dependence on external assistance or advice.
Here are some basic terminologies used in debt markets.
Debt market is a place where debt paper, like say government bonds, is traded. It is no physical place; it is a platform, where buyers and sellers trade debt paper, something roughly similar to a stock market.
Debt paper is a paper, which is issued by a borrower when s/he takes a loan (debt). If a borrower takes a loan of Rs 100 for a period of 10 years @ 10 per cent, then the paper which he issues to the lender is the debt paper. The debt paper issued will have a face value of Rs 100 (as that is the loan given), maturity of 10 years (as that is the term of the loan) and Coupon (interest rate) of 10 per cent.
Coupon is the interest the borrower promises to pay to the lender. This never changes. In our example, the lender will continue to get Rs 10 as interest every year for the next 10 years.
It is important to note that neither the face value nor the coupon of a bond changes. What changes are the market value and the yield (in simple terms interest earned on investment). In the previous article we had seen, if interest rates go down the market price of the bond goes up and consequently its yield comes down.
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