Bonds and Stocks
Bonds and Stocks
Considering the results in part c and d, I could say that there is a 50/50 chance of gaining or losing from investing in short term bonds. Like for instance, the case of bond no. 1, by changing the interest rate it would also mean that its level of yield varies alongside with the interest rate. The gain or loss on investing bonds depends on a lot of factors and interest rates of financial institutions is one of those factors that affects the level of gain or loss in investing short term and even long term bonds.
Answer 1f Well, corporate bonds are being subject to the condition of the demand and supply of bonds that corporations are trading with. This means that there is no entity that imposes some changes in the factors of bonds like the Federal Reserve Banks on default free government bonds. Here, in corporate bonds, the gain or loss in investing into bonds depends on the amount of bonds that are available for trading as well as the number of person who wants to buy the bonds of that certain corporation.
It is also being traded in the stock market (Direct. gov. uk, 2007). In short, it is the market system that affects the performance of the bond market and not any other entity. Moreover, there is more gain in corporate bonds as compared to government bonds since interest rates in corporate bonds are higher than of the government bonds. Part II With regards to the factors that affect the prices of stocks, there are a lot of possible factors that affects its price level. One of which is the expectations of the investors.
It is said that if the investors foresee that prices of stocks will increase by next month; their tendency is to buy more stocks now and sell it next month in order to have a gain (Shiller, 1999). Another factor that affects the level of stock price, based from the model discussed by Pages in his paper, is the growth rate of dividends. Growth rate of dividends affects the stock price through attracting more investors to purchase stocks and thus affecting increasing the demand for that stock which gives way towards the raise of its price (Pages, 1999).
If the execs of a certain company declare to increase the dividends of their outstanding stocks at the end of the year, then, there would be more investors that will buy the stocks of that company. Since the demand for the stock of the company has increased, by law of supply and demand, its price would also increase. The only loophole that I see in the model is that it does not include the knowledge of the investors in the market conditions. As what I have said a while ago, investors sometimes affects stocks prices through their expectations on the future performance of the stocks and this factor is not included in the model.
References Direct. gov. uk. (2007). Corporate bonds and government bonds. Retrieved October 20, 2007 from http://www. direct. gov. uk/en/MoneyTaxAndBenefits/ManagingMoney/SavingsAndInvestments/DG_10013986 Pages, H. (1999). A note on the Gordon growth model with non-stationary dividend growth. Retrieved October 20, 2007, from http://www. bis. org/publ/work75. pdf Shiller, R. J. (1999). Measuring Bubble Expectations and Investor Confidence. Retrieved October 20, 2007, from http://cowles. econ. yale. edu/P/cd/d12a/d1212. pdf