[MUSIC] Hi again. So, in this video, now, we're going to have a look at the main concepts which you need to master when you're investing in government bonds. The concept of coupon, the concept of principal, maturity, duration, yield and yield to maturity. But let's start with coupon and principal, and I'm going to do this with this tablet here. Okay, so. Assume that we have these two axis. Here is time, measured in years. And let's assume that you're investing in a government, which has a length of maturity of five years. Okay, so this is year one, year 2, year 3, 4 and 5, okay? Well, this is on this scale, the Dollar, this is US treasury. So, government issued by the US government. And the idea is that, it gives you out as we just said, a pre-defined stream of revenue. So each year, you're going to get a coupon, which we show in this bar. Assume that this is, I don't know, $100, okay? So basically you get $100 each year, and say you've invested $1,000 in this bond, okay. And so, end year five, you get your $1,000 back, plus obviously also the extra coupon of 100, okay. So you see coupon 1, coupon 2, 3, 4, 5 and your principle back. Let's illustrate this in a more practical way, actually. So, what I'm going to do is show you with the, this thing here. And you, yes, you, camerawoman, please, please come over here. Hello, what's your name? >> Lori. >> Hi. >> Hi. >> Michel, nice to meet you. Okay, so, Neomi, you've invested in this very successful company, which called Coursera, you've heard of them? >> A little bit. >> A little bit, right? Very successful. So, you've decided to put your money here in this company, and actually you've made the quite a high return. So, you've won all this liquidity, right? So this is your capital or principal, as we saw. Hence, now you say, okay I made a lot of money investing in the share, in the equity market, but now I would like to take a bit less risk. So you don't want to take such a risky investment as investing in equities and you'd rather go for a government bond. So you want to take all your money here, this capital, and you want to invest in a government bond. So what we're going to see now, is the key concept of duration and the difference between duration. This is duration and we'll see how it works. And maturity, but before we do that, we have to remember, this is your capital, this is what you get back. And when you invest in the treasury, as we saw from the previous slide, you're going to make a coupon, right. So year one, you make $100. Year two, let's see if we're more or less, whoops, yes. Year three, and year four. Okay, normally, there should be year five, there should be a glass which would put on top here, but it's already quite tricky to put all this in balance, so we're going to try. Yes, maybe please. The idea is that, we put this in equilibrium. And as you can see, obviously the equilibrium point is somewhere around here. I'll hold this, and let's see if you can find the, yes. >> Almost, almost. >> It looks like it, we don't breathe and you can see. You see where this duration is, it's not in the middle, it's not 2.5 somewhere there in the middle. It's not here. It's somewhere around four, so the key difference between the maturity of a bond which is five, is this duration. That's where all the cash flows. The income you get each year in liquidity. And the principal you get at the end of when the bond matures, is here. It's four, okay? So, when I first knew about bonds, I thought the duration was some kind of, I don't know, average maturity. Maybe 2.5. It's not. Well, let's see, maybe what works, what happens. Can you hold there? So you can already imagine what is going to happen, now if you let go. Well, this is what happens when you make a confusion between a duration and maturity. Maybe you have to transform yourself into a central bank, and that needs to go and save investor from a liquidity crisis in the bond market. >> Well that was pretty convincing. Thank you, professor. >> Thank you Noemi. Thank you.