Bonds

What do I know about bonds?

They are a form of money lending.  For certain tenor.  In rite sized denominations.  With assured and fixed coupons.  Usually redeemed semiannually.  The principal is repaid when the loan matures.

What is a loan?  I have advanced Rs 882 to my ironman.  He is going to service this credit by ironing at Rs 3 per shirt.  At the end of some finite period, he will have paid the loan back in services.  But my capital will have been consumed as purchase of services and I cannot repeat the cycle.  Money should beget money.  That is what financial capital is.  In school we would write M-C-M’ (read M C Mprime).

The idea is fairly old and respectable that nature multiplies over time.  Flocks grow larger, trees give fruit, and grapes turn into wine over time.  There is a natural rate, typical to the particular growth process that we are interested in, take potatoes for example, at which, normally, nature multiplies.  And this is the original justification for the phenomenon of interest.

So to get back to the creditor:  he may have many motives.  One of them could be to derive a steady, predictable source of income from his capital.  He could choose to invest in a company, or a venture (and what he then earns are profits) or he could lend his money out, thus earning interest (the rate of interest).  The scheme is roughly that the entrepreneur pays for the use of money. And drives a wedge between the rate of profit and the rate of interest.  It is the tension between the rate of profit and rate of interest that is driving the demand for funds.  Funds for ostentatious and voluptuary consumption are (I think, got to look at the data here) judiciously small.

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