Extrapolating the Bond Yield Curve to the Bond We Share With Our Family

Excessive study of graphs and equations in a specialized field can be overwhelming for any student. With the structured nature of our education system, it can be even more difficult to retain what we learn after we graduate. The best education one can achieve is by applying a theory to the real world and discovering the outcomes, even if it is outside the context of our curriculum.

When it comes to the curriculum of finance, it is in our best interest to have some basic knowledge of estimating costs, risks and understanding savings and investments to augment our financial security.

On that note of self-interest, I would like to use this platform to talk about bonds and their interest. Using a rudimentary analysis, I will demonstrate how the bond yield curve can be used to describe the bond between parents and their offspring. And what a better day to talk about family bonding than on the auspicious day of Diwali! 

First, a quick Finance 101 refresher on bonds and the yield curve.

bond yeild curve

Background: A bond yield curve is the graphical representation of the yield or interest that a bond delivers on the Y-axis with time to maturity on the X-axis.

What is a bond? It is fixed-income security (because payments are made at fixed intervals) that allows the bond issuer to raise capital and the bond buyer to have a steady form of investment. Bonds are generally less risky, and therefore offer lesser return, than say, investing in stocks.

Two important terms to note here are the bond issuer and the bond buyer.

Bond issuer: You may have read headlines about US Treasury bonds or corporations issuing bonds on the Wall Street Journal. In the former, the US government is issuing bonds to raise money from the public to let’s say, finance infrastructure related development and in the latter, to finance a project/acquisition etc. Treasuries of a government or a company issue bonds when they need to raise more capital than they are able to borrow from a bank.

Bond buyer: You, as the buyer of the bond, will determine if it is worthy of keeping as an investment based on the credibility of the bond issuer. Government bonds are technically more trustworthy because the government has lesser chances of defaulting than a company. However, if the corporation has a solid credit rating, you will feel more secure knowing that the issuer will repay your payment (plus interest) based on the terms of the bond (interest rate, maturity etc.)

The yield curve: Since a bond buyer (you) is essentially lending money to the bond issuer (government treasury, corporation, municipality etc.) with the expectation of receiving it back with due interest, the interest rate should be directly proportional to the maturity (when the bond expires). The interest (bond yield) compensates the bond buyer for the risk of holding the bond over a period of time. In a stable economy, the yield on the Y-axis will increase as time to maturity increases on the X-axis but the inverse can also happen during a recession.

Application: Assuming the parents or any form of guardians as the bond buyers, they lend their time, energy and savings to the their children, who in turn, are the bond issuers. The bond buyers (parents) live with the expectation that their investment on their kids (bond issuers) will pay off with due interest.The “interest”, here, is nothing but the happiness of the parents derived from the children taking interest to care for them.

Thus, the happiness of parents can be represented as the yield on the Y-axis and the mental and physical time to maturity of the offspring can be represented on the X-axis. In such a scenario, a rising curve implies a content family environment as the children continue to take “interest” in their aging parents’ welfare as they themselves grow older and hopefully, more mature and financially secure. On the other hand, if the children happen to neglect their duties towards their parents, the curve declines.

curve

Limitations and drawbacks: I am aware that this is not a perfect analogy because great friends and even pets can turn into family, especially for an individual who may not have much of a family to begin with or had parents who may have been absent, abusive or abandoned them in their care. Barring that lot, it is easy to neglect all the sacrifices our parents have made for our upbringing. Though I am no ideal kid, the best way I have learned to address this neglect is by looking inward and questioning myself, “If I had a child, would I want him or her to be doing what I am about to do?”

Conclusion and Moral Application: This whole concept of extrapolating the yield curve to yielding the emotional bond between parents and their children is to extend the understanding of educational knowledge with self-knowledge.

This application may be extended because having a strong bond with our family isn’t just about being a good son or daughter, it is about the increasing emotional deficiency we face in our society. We often neglect or feel neglected by those we love whether it be with our partner, our kids, our parents or even our close friends. While it is important to strive towards maintaining the two pillars of any relationship- honesty and communication, sometimes, just offering a good listening ear can go a long way in mending hearts and healing others and ourselves. 

I hope this has been informative and enlightening for you in some measure. If so, please do comment and share your thoughts. I love to receive feedback that will help me continue writing for you. Thank you and Diwali Mubarak 🙂

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One Response to Extrapolating the Bond Yield Curve to the Bond We Share With Our Family

  1. Reema says:

    You even manage to make Finance interesting. O_o what scorecery is this?!

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