Relationship Between Bond Price and Interest Rate

Tools that the Federal Reserve policy makers use to influence the money supply and interest rates

Three essays on the term structure of interest rates

Let’s return to the situation involving a three-year bond with a 6 percent coupon that was purchased for $960.99 and had a promised yield of 7.5 percent. Suppose that interest rates increased sharply and the price of the bond plummeted. Disgruntled, you sold the bond for $750.79 after having owned it for two years. The time line for the realized cash flows looks like this:

Some financial institutions may face higher interest rate risk while others face higher insolvency risk....

influence the money supply and interest rates

The dream is to manage labor’s savings on a commission basis, steering it to inflate stock and bond prices. And indeed, pension-fund savings did fuel a stock market run-up from the 1960s onward. In the process, they provided corporate raiders and other financial managers with funds to use against labor – and against industrial capital itself. Pension fund managers played a large role in the junk bonding of industry in the 1980s. And finding themselves graded on their performance every three months, fund managers back raiders who seek to gain by downsizing and outsourcing labor.

The relationship between short and long-term interest rates as the time to maturity of the debt increases

The other strong tool that the policy makers use to influence money supply and interest rates is open market operations. This strategy involves the buying and selling of government bonds in the open market. In this regard, the Federal Reserve pays for treasury bonds with cash and obtains bonds from banks or investors if they purchase them in the open market. Moreover, they deposit this money into banks thereby increasing the money supply. This strategy clearly indicates that the Federal Reserve increases money supply. Consequently, when there is increased money supply, the value of the money reduces thereby reducing interest rates. This again indicates that the Federal Reserve lowers the interest rates. The Federal Reserve is also in a position of raising the interest rates. They can clearly do this by selling there bonds in an open market. By so doing, the banks and investors will tend to hold the bonds while they release cash for them. Consequently, this causes a reduction in the money supply, which reduces its value, thereby increasing the interest rates. This indicates that the open market operations utilize a reverse strategy, which either increases money supply thereby lowering interest rates or reduces money supply thereby raising the interest rates. This is far much the most easy and rational toll for controlling money supply and interest rates.

This dissertation is formed of three essays on the term structure of interest rates

Assume interest rates for bonds today is 5% for an AAA rated bond

Had this drop not happened, the property index would’ve been up 45% over the interest hike period.

When interest rates went up by 0.25% in July 2015, the property index dropped 4% over the next month.

as longer maturity makes bond price more sensitive to interest rates

Erasing all losses following the interest rate increase and adding some gains as well.

In short, there’s very little direct correlation between interest rates and REIT performance.

Why do bond prices go down when interest rates go …

That means it fixes portions of the debt it has at specific interest rates for one, three and even five years ahead of time.

So the companies don’t receive shock increases in interest payments when rates go up.

Furthermore, all these companies build automatic rental increases into their contracts on an annual basis, so they continue getting more income from the same properties year after year.

And as this income rises so does the amount of money the company can pay to you, the shareholder, in the form of dividends.

I’ve just revealed a company I expect will increase dividends rapidly as it builds on its South African and African property portfolio in the coming year.

Why do bond prices go down when interest rates go up?

A point arrives at which bankers and investors recognize that no society’s productive powers can long support the growth of interest-bearing debt at compound rates. Seeing that the pretense must end, they call in their loans and foreclose on the property of debtors, forcing the sale of property under crisis conditions as the financial system collapses in a convulsion of bankruptcy.