Informative Guide To The Relationship Between Bonds And

Interest Rates
It is crucial that you understand that bonds and interest rates have an inverse relationship, meaning
that when interest rates go up, existing bond prices go down, when interest rates are low, bond
costs are quite high. Since the meeting, Fed officials have increasingly flagged the dollar's rise as
hindering a rebound. While unemployment fell to 5.9 percent in September, inflation measures have
eased and the International Monetary Fund slashed its worldwide economic growth outlooks on
Tuesday. U.S. 2015 short-term interest rate futures climbed to contract highs on Wednesday,
implying traders observed less than a 50 percent likelihood of a rate rise in July next year, according
to CME Group's FedWatch. In its statement, the Federal Reserve said it would keep the federal
funds rate at zero to 1/4 percent at least through mid-2015.
As you'd guess, if interest rates decreased to 2 percent and Matt wished to sell his bond, his could
sell at a premium or above par value. This is yet another way to illustrate the inverse associations
between interest rates and bond costs, and remind one to consider the ups and downs before
jumping to the bond market. When you have federal student loans or plan on using them to fund
your instruction, realize that you simply can't shop around for rates since they're set under the
federal Direct Loan program.
It was created in 1913 together with the Federal Reserve Act as a means to centralize and regulate
banking in order to avoid economic collapse. Now, as the country 's central bank, the Fed supervises
other banks to make sure they're safe places for people to keep their money. The Fed also analyzes
economic trends and makes conclusions designed to maintain the economy healthy and employment
levels high.
A zero-coupon bond implies the bond doesn't dole out interest payments during the life of the bond.
The majority of bond computations will entail interest rates, coupon rates, payments and frequencies
as well as other factors which increase the computation's intricacy. Generally, investors are
constantly seeking the highest rate of return for every unit of risk they take on. If current interest
rates were to increase to 5 percent, then having a zero-coupon bond which is simply generating 3
percent becomes less alluring. One more way to see this relationship in action would be to add on a
coupon (interest) rate. Based on the Federal Reserve, the average 48-month new car loan rate is
4.87%.
Experts credit the bump in rates to several factors including a better-than-expected September jobs
report. Meanwhile, news that European leaders are beginning to cobble together a feasible strategy
to solve the region's sovereign debt and banking sector disasters has boosted investor confidence at
the same time. While little has changed on the housing front when it comes to mortgages and home
loans, the way to solve the nation's housing market woes might not be just a matter of lowering
interest rates further. The minutes expressed concern the growing dollar could impede a needed
recovery in inflation.
The Federal Reserve has been highlighting it will not back from its protracted policy to facilitate
rates before the country 's stubbornly high jobless rates have dropped to historically acceptable
amounts. Merrill Lynch is forecasting higher rates at the end of this year and into 2014. Further,
according to models employed by the company, Misra said the market is acting as if the Fed will
raise interest rates prior to the finish of 2014.