what is the relationship between stock & bond?

Question

when stock rise, does bond go down? do they have an opposite relationship, or do they both go up at the same time?

why?

Answer 1

Stock - Shares of common stock is Equity, or ownership in a company. When you buy stock you are participating in the successes or failures of that enterprise. A stock's price on the exchange is based on the aggregrate of investor's perception of the current value of the business. If investors in aggregrate feel the stock price is above what its worth they in aggregrate will sell more shares than are being bought and based on the laws of supply and demand cause the price to decline, and vice versa.

Bonds- Bonds are how companies borrow money from the investing public. Most bonds have a stated percentage of the face value of the bond interest payment. This payment rate is called the coupon rate & the face value is called the Par Value. The par value is nearly always $1,000.00 and bond prices are quoted as a percentage of par. So a bond priced at 102.25 would cost you $1,022.50 per bond. The may have different structures and features, some of these may have benefits to the company (such as the right to call in the bonds. The biggest influence on movement of bond prices are interest rate changes (more precisely the markets' expectations for interest changes). When interest rates go up bond prices go down, and vice versa. For instance, say you had a bond that matures in 5 years with a 6% coupon. But interest rates have since gone down. Now the same bond issuer issues a new 5 year bond with a 5% coupon and the market value of this bond is at Par. If some one had the choice to buy your bond or the new one, they'd want yours since the coupon is higher. Thus the market moves the price of your bond up until it becomes an equavalient value to the new one at par.

So, do they move up and down together or opposite? The answer is sorta both:

While interest rate declines might make stocks more attractive (better returns than the now lower paying interest bearing investment, companies have lower borrowing costs which improves profitablity and encourages expansion). While at the same time the interest rate declines raise bond prices.

But, if investors perceive impending economic trouble they might sell stocks and buy bonds to protect their investment capital.

The financial markets are complex, and the factors influencing the price of stocks and bonds almost immeasurable. Actually, that's what the price is, a measurement of all these influences on the perceived present value of an investment.


You can actually use statistics to calculate the relationship by calculating the Coeffiecent of Correlation between two investments. A CoC of 1 means that they move up & down in prefect harmony (but not necessarily to the same degree), and a CoC of -1 means they move in opposite directions, While a CoC of zero means they have no connection what so ever. I was trying to find it but couldn't but I seem to remember reading that the CoC of one of the equity indexes to the bond index was about 0.4 so there's some positive cooreletion but it's moderately low. In portfolio theory, when your building a portfolio you can reduce your risk by diversifying and get the most benefit of that diversification by adding investments that have low CoC to your current holdings.

Answer 2

They have an inverse relationship. That means that when stock prices go up, bond prices go down. The simplest reason for this is that bonds tend to be the investment of choice when there is a "bear" stock market because as a whole they tend to be less volatile. This higher demand means a higher price.

Answer 3

As interest rates go up bond prices go down and as interest rates go down bond prices go up. Usually, when bonds go up stocks go down and vice versa but not always.