How Bonds Trading Affects the HK Economy
Through its financial branch departments, the HKSAR government issues bonds to the general public every budget year (April 1-March 31). Those issued would go into circulation and can be bought by banks or other financial institutions, then resell them again to the general public.
The interest rate of these bonds is often low due to a large volume being traded in a short amount of time. Hong Kong citizens have an opportunity to put their money into a valuable paper that can’t quickly be taken away from them by inflation or governmentality.
In addition, they contribute directly to propping up the treasury’s revenues without having too much effect on inflation because so many other bonds are issued.
When are bonds redeemed?
Bonds could be redeemed at their face value any time before they mature. If a citizen owns 1 HKD bond and decides he wants 1 USD worth of it back, the government will give him only one USD for each HKD1 bond he owns.
The risk is minimized because there aren’t many people who redeem their paper all at once. After all, the interest rate isn’t very high (and thus not much profit). Bonds traders are less likely to experience emotional meltdowns due to big losses.
Another measurement called duration measures how long it takes for total redemption to reach 100%. Redeeming multiple times over the years will increase duration because you’re cutting into possible future profits that you could make from invested capital.
Other Bonds Types
Other kinds of bonds exist, such as inflation-indexed bonds, which are pegged to a consumer price index. Inflation means that the number of paper money increases over time, meaning citizens need more and more paper bills to buy the same product.
Inflation-indexed bonds allow citizens to hedge against this because it adds a layer of value to the bond if inflation goes up. At a certain point in time, a citizen could redeem a piece of paper issued decades ago.
However, it would still have significant buying power because so much time has passed, and the capital held onto the system is worth so much money over time. It can be seen as an example of Hong Kong being involved with other economies worldwide through its dealings with foreign currency in general.
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How does this affect the economy?
The Hong Kong economy is largely consumer-based because citizens can make investments like these, allowing them to save money for future returns instead of spending it on more immediate desires.
It’s a way for people who don’t have much capital at their disposal (such as students or senior citizens) to still be involved with other economies by making wise financial decisions that aren’t easy for other people to implement.
How this affects the people
This way allows citizens more flexibility in making wise financial decisions, more transparency on how the government is using their money, and a way for those who don’t have as much capital to make profitable investments still.
It also helps keep inflation from going out of control because there are so many different bonds issued, which, when combined, generate needed revenue for the treasury without causing severe inflation over time.
It’s not as easy as it sounds because so many different kinds of bonds are issued every year, some with reasonable interest rates and others with meagre rates that make them unattractive to investors.
The more demand a bond has, the less it costs to buy into it. For example, if the government wants to issue a new kind of bond this year but first had their previous bonds redeemed by investors at a high rate (thus making its first debts worth less), they may offer an attractive interest rate for people who want to trade in these old bonds for new ones.
However, since there is only so much capital available at any given time between all citizens, this means that an investor may be able to buy into one bond only by not being able to buy into another. It can continue until the entire treasury is spent on bond trading.