Thank you very much for your help. Very much appreciated!
**How do bonds work?**
Put as simply as I could:
1. Government/firm issues a bond with a coupon rate (interest rate) similar to the market interest rate.
2. **Primary market:** according to RBA (*2022),* when an investor has purchased the bond **for the first time,** this is called buying in the **primary** **market**. *(This first price of bond depends on interest rate, term of bond, and price of similar bonds).*
3. **In the primary market, the buyer pays the face (nominal) value of the bond, and the yield (aka return) matches the bonds coupon rate.** The buyer will want the coupon rate/yield to be higher than market interest rates.
4. But if later on the bondholder decides to sell the bond before maturity, (due to many factors) it will be sold on the '“**secondary market.”**
5. **In the secondary market -** bond market price fluctuates on top of the face value because of supply and demand. There are many factors affecting bond like competing market interest rates (shown below) and the yield of the bond. Makes sense, right? When market prices exceed the face value of a bond, you are paying at a premium. When market prices are below face value of a bond, you are paying at a discount
6. Bondholders will need to recalculate the yield, as the coupon rate no longer matches the yield (because market prices have changed). This is done using this simple formula: coupon / market price x 100 **The relationship between the market price and bond yield is inverse.** *(EconplusDal, 2017)*