One of the factors that affect the two in the same

  • No School
  • AA 1
  • 3

This preview shows page 1 - 3 out of 3 pages.

react differently and almost in opposite directions. One of the factors that affect the two in the same direction is supply and demand. When the supply is more than the demand then the prices will go down and when the demand is more than the supply then the prices will go up. When the general economic situation is good, people will rush for stocks as opposed to bonds as they will be anticipating the prices to go up. When/If the economy is not doing quite well, bonds are the safer bargains since they have a guaranteed yield no matter the economic situation. Other factors that affect the bond prices is the prevailing interest’s rate and how highly the bond is rated. In addition to that, the company issuing the bond history and its rating also has an effect on the yield and bond price. This is because the yield is basically a measure of the risk that the bond entails and stands for the investor’s compensation for investing in the bond.
Image of page 1

Subscribe to view the full document.

Bond Prices as a Signal for Economic Down turn Interest Rates: When interest rates go up, the prices of bonds will go down. When interest rates fall, the prices of bonds will go up. This works opposite as the norm in the general economy. Inflation: When inflation is high on the economy, the prices of bonds will go down and when inflation is on a decline, the prices of bonds will go up. This is because inflation reduces the purchasing power meaning that the end returns will be less in terms of their worth.
Image of page 2
References Green, T. C. (2004). Economic news and the impact of trading on bond prices. The Journal of Finance , 59 (3), 1201-1233. Park, K., Jung, M., & Lee, S. (2018). Credit ratings and convertible bond prices: a simulation based valuation. The European Journal of Finance , 24 (12), 1001-1025. Cox, J. C., Ingersoll Jr, J. E., & Ross, S. A. (2005). A theory of the term structure of interest rates. In Theory of Valuation (pp. 129-164).
Image of page 3

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Ask Expert Tutors You can ask 0 bonus questions You can ask 0 questions (0 expire soon) You can ask 0 questions (will expire )
Answers in as fast as 15 minutes