How are bond prices, interest rates, stocks generally related?

Question

In what circumstances do they go up/down and how are they related (generally)?

Answer 1

In general the price of a bond should be inversely related to interest rates (ie if a bond pays 2% interest and interest rates go up to 4% the price of the bond will drop until the bond pays 4% to a new investor.)

Interest rate hikes are generally bad for stocks because 1) higher rates can draw conservative investors away from the stock market, 2) higher rates make it more expensive for companies to borrow money to fund expansions and slow the economy generally.

Over the long term stock prices are effected by the performance of the underlying company. If companies do well, generally speaking, their stock prices go up. (theoretically the price of a share of stock should be equal to the discounted cash flows generated by the company per share--ie how much cash you can get out of it taking into account the fact that a dollar generated twenty years from now will be worth less to an investor than a dollar generated now because he can invest the dollar and have it be worth considerably more 20 years down the road.)

Answer 2

Here are the basics...

Stocks generally go up or down based on the strength of the economy and corporate earnings. Interest rates affect different businesses differently, but overall, higher rates are not the best environment for stocks (in general).

Bond prices are based on 2 main factors (there are several but these are the main factors). 1 is the coupon or interest rate the bond pays verses the comparable maturity US Treasury. The second is the credit of the company. A highly rated company will be closer to the comparable US Treasury price wheras a lower rated bond will have a lower price even though the coupon and maturity may be the same as a higher rated bond.

Interest rates play a role in the equation because the US Treasury prices move based on the Federal Funds Rate (the rate that the Federal Reserve adjusts to fight inflation or recession).

In simple terms...rising rates are usually detrimental to most stocks and bonds that are already issued. Rising rates are good if you are buying "new issue" bonds because therir price is based on the higher rate and you will get a higher coupon or interest rate for the same price you may have gotten a lower coupon bond a few months prior. Falling rates are basically good for stocks and existing bonds, but not for "new issue" bonds as you could have gotten a better interest rate for the same price in previous months.

Hope this helps...

Answer 3

The New Investor Special Report
By: Peter Leeds

There is a lot of information on this web site, plus there are company links to do more research with!

Answer 4

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