The Bond Market - Research Paper Example

Task Introduction The milieu in, which the issuance and trading of liability securities happens, is referred to as the bond market. The bond market deals with state-issued securities, shared debt securities, and enhancement of transfer of investment from savers to the issuers. These funds are required to fund state projects, business expansions and ongoing operations (Brett, 17). Government issues securities refer to the loan term loans offered to the public though issuance of bonds. They enable the government to raises capital from the public. On the other hand, corporate debt refers to the property owned by a business, which can serve as an income distress absorber to a specific class of stakeholders. This paper intends to outline the issues that surround bond market in the current market. The U.S. Federal Reserve (“the Fed”) plays a progressively active role in the performance of the economy and financial markets with its numerous tools. How does Federal Reserve policy affect the bond market? Essentially, the Federal Reserve plays a key role in providing a monetary climate, which is intended in promoting economic stability and simultaneously maintaining consistent economic growth. The Federal Reserve strives to maintain the peaks and troughs at minimum levels. It is impertive3 to note that the Federal Reserve accomplishes their role through manipulation of two interest rate levels (Brett, 17). They include the Federal Funds rates and the Discount Rate. The Federal Funds rate refers to the rates banks charge each other to borrow reserves overnight while refers to rate the Federal charges for bank reserve borrowing. It is significant that, changes in both rates have a direct impact on the bond market, yield levels. It is imperative to note that, the corporate bonds always yield more than the government bonds. This is to account for the risk. The Federal Reserve plays a key role in influencing the bond market by controlling the prices and rates of bonds. This enhances controlling of the inflations rates. For instance, investors who buy bonds with a maturity period longer than a couple of years ago have augmented risk disclosure to the level of inflation and its attrition of prospect cash flow values (Brett, 15). However, the Federal Reserve moderates this situation by targeting the level of inflation because inflation expectations have bigger shock on the echelon of interest rates for prolonged maturity bonds than shorter outcome consequently, regulation of the bond market. For the case of bonds with long maturity number of years, the Federal Reserve endeavors to regulate inflation rates. This is because, the levels of inflation directly affects the inflation of expectations consequently increased level of interest rates for longer maturity bonds than shorter maturity bonds (Brett, 16). Fundamentally, the Federal Reserve directly controls the shorter maturity yield levels. The influence caused by the Federal Reserve on the interest rates consequently, significant change is indicated in the levels of yields. The yield curve normally represents the yield market levels. More over, Brett asserts that, the current bull market in bonds will only end if inflation rates rise. This implies that, the current economic status is sluggish and it is characterized by unemployment and high rate of inflation. Bibliography Brett Arends. Bonds- Heading from Bull Market to Bubble. The Journal of The Wall Street. 15.9 (2012): 15- 19. Print. What happens to interest rates as bond prices rise? The bond markets are extremely active. The interest rates are constantly changing in response to numerous factors, which include changes in demand and supply of credit, market psychology, economic conditions, fiscal policy, Federal Reserve policy and exchange rates. It is significant to note that, as interest rates change, a consequent change in values of all bonds in the market place is expected. For instance, when, interest rates increase bonds with longer maturity periods are immensely affected compared with those with shorter maturity rates. A bond with longer maturity period is expected to lose more of its value. It is significant to note that, increase in interest rates leads to going up of bond prices consequently, drop in yields. It is advisable for individuals with bonds, to redeem the maturing bond, when interest rates increase. This will earn the par or face value. Similarly, if one decides to sell bonds when the rates have gone down, the value of the bonds will have gone up giving a capital gain. It is crucial to note that, the bond values move in the opposite direction of interest rates. This study establishes that, positive reviews to the latest round of bond purchasing in a policy last month were made. The September decision of buying $40 billion of mortgage- attributed securities on a monthly basis was deemed as the most effective ever in the bid of lowering long-term interest rates. This has helped in supporting and recovering the housing market consequently making the homes more affordable. Bibliography Robert Wade. Fed Assesses Its Bond Buys. The Journal of The Wall Street. 14.11 (2012): 24- 27. Print. What interest rate do businesses and homebuyers watch? The commercial dealers and homebuyers should check on the prime rates. The prime rates represent the interest rates offered to numerous banks’ best borrowers. However, this rate has become an index, in which to calculate other interests’ rates (Michael, 15). It should be noted that, the prime rate has a significant effect on the short-term borrowers. They are affected directly. The prime rate is fundamental in serving consumers and commercial borrowing. It serves as an effective index. The prime rate has little consequence on most mortgage interest rates; however, being a national benchmark it encourages fluctuation of mortgage rates in a relatively similarity. Though refinancing a home is stalwartly rate-driven, home purchases can designate the correlation of the prime rate on mortgage credit volume. For example, a low prime rate often equates to advance commercial borrowing, allowing companies to grow and prosper (Michael, 16). Homebuyers experience intimate job security, which motivates more home sales and new-fangled mortgages. Lenders in search of higher loan amount often shear mortgage rates downward to draw new-fangled borrowers. Although the prime rate did not scientifically manipulate mortgage rates, it did indirectly persuade an interest rate decrease (Michael, 14). On the same note, the expected upward pressure on rates is probably considered a challenge that will compel the Federal Government to sell relatively larger amounts of bonds to finance its gigantic budget deficit. Bibliography Michael Pollock. Don't Be Complacent in Bonds. The Journal of The Wall Street., 6. 7 (2010): 17-23. Print. How do changes in bond the market affect the economy? Whether the interest rate activities are caused by Federal Reserve procedures, economic environment or inflation fears, the collision on the bond investor is the same: Increased interest charges diminish accessible bond values. Similarly, declining interest rates increase accessible bond values (Chris, 13). The price that a bond sells for in the market, today is the sum of all prospected cash flows remain economical in value because they are not available Presently (Chris, 13). A dollar is worth less to you on the day after today than today. The discount rate represent the rate of interest accessible in the market for bonds of that share similar risk and maturity. When that interest rate changes, it influences the cost of all bonds, but to anecdotal degrees (Chris, 14). A long maturity period of bond investments causes bigger price volatility consequently a volatile economy. However, a shorter maturity period of bond investments causes lesser price volatility consequently a lesser volatile economy. Bibliography Chris Gay. “Will Rising Rates Upend Your Bond Fund”? Journal of US News Business 23. 7 (2011): 12- 17. Print. Bibliography Brett Arends. Bonds- Heading from Bull Market to Bubble. The Journal of The Wall Street. 15.9 (2012): 15- 19. Print. Chris Gay. “Will Rising Rates Upend Your Bond Fund”? Journal of US News Business 23. 7 (2011): 12- 17. Print. Michael Pollock. Don't Be Complacent in Bonds. The Journal of The Wall Street., 6. 7 (2010): 17-23. Print. Robert Wade. Fed Assesses Its Bond Buys. The Journal of The Wall Street. 14.11 (2012): 24- 27. Print. Read More