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Dear Mr Moffat
Q77 part C require to discuss about the European Sovereign Crisis, its implications for the banks in this zones and ect.
Part of the answer explains possible reasons of the crisis in which it mentioned that “…Unlike the UK, where the central bank is able to print money and devalue the currency if necessary to payback sterling -denominated debt…”
Could you please elaborate on this as I think the UK’s loans would also be denominated in Euro but this statement means that I am wrong.
Thank you very much.
Hanhvn
The UK is not in the Eurozone, and so although they could have loans in Euros, most of them are going to be in sterling (GB pounds).
Dear John,
Same Your company question – where the euro-crisis is explained as “Yields on government bonds in troubled countries rose, bond prices fell…” could you confirm whether my understanding is correct ?
When buying a government bond, the government is supposed to pay you interest at defined periodical time – are we saying here that during Euro crisis, these interest payment were not honoured ?
The price of the bond fell because of the associated risk of interest payment postponement – we are talking about the market price of any bond previously acquired, for which value has reduced in the market
Am i correct ?
You are confusing ‘yield’ with ‘coupon rate’.
The coupon rate is the interest on nominal value, and this is fixed.
The yield is the interest on market value and is the return demanded by investors buying the bonds on the open market. If they want a higher yield then the market value falls, and vice versa.
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