![if interest rates increase, the value of a fixed income contract decreases and vice versa if interest rates increase, the value of a fixed income contract decreases and vice versa](https://miro.medium.com/max/708/1*Yhhbndnik6bXUZrG2gsmqg.png)
In actuality, interest is usually paid with goods or services, increased courtesy, or an implicit commitment to help each other out similarly in the future. Bonds within families and between friends often trade with the appearance of zero interest. In economic lingo, your parents bought your $1000 bond. When your parents lend you $1000 to help buy a car in exchange for your promise to repay them $100/month, and for your agreeing to keep your room a little cleaner, the $1000 is the principal and the room cleaning is the interest. In economics, the interest is a payment for the service of having the money or resources in advance. In addition to repaying the principal, or original amount borrowed, the borrower usually pays interest to the lender. It’s much easier to understand borrowing and lending than abstract vocabulary like “the bond market”-even though they are the same thing-because we can by think about our own familiar experiences with borrowing and lending. Simply remembering that bond buyers are lenders, bond sellers are borrowers, and that they are trading not pieces of paper but promises, can unlock the door to understanding both the vocabulary and the economics of a wide range of economic behavior, from private loans to interest rates to government budget deficits. You may not realize it, but you buy and sell bonds all the time! Every time you lend someone a few dollars for lunch or borrow your friend’s car in exchange for filling her tank, in economic terms you are buying and selling bonds.
![if interest rates increase, the value of a fixed income contract decreases and vice versa if interest rates increase, the value of a fixed income contract decreases and vice versa](https://www.elibrary.imf.org/view/books/069/22606-9781513579191-en/images/9781513579191_t0080-01.jpg)
The bond sellers receive money now and in exchange for their promises of future repayment-that is, they are borrowers.īonds can be traded privately between individuals or in organized markets, called bond markets or credit markets. The bond buyers pay now in exchange for promises of future repayment-that is, they are lenders. Promises-that is, bonds-can be bought and sold. It is a promise to pay something in the future in exchange for receiving something today.