Question

The Economist article, “Many Unhappy Returns,” November 21, 2015, states the following, “The yield on long-dated Treasury bonds 25 years ago was more than 8%; an investor who held such bonds to maturity could lock in that nominal return. Now the yield on the 10-year Treasury bond is just 2.3%. Yields on corporate bonds, which pay a spread over government debt, have fallen in tandem. For equities, the dividend yield on the S&P 500 index in 1990 was 3.7%; now it is just 2.1%...Yields move in the opposite direction to prices. They are low because the price of equities and bonds has risen dramatically in recent years.

a. What is the relation between bond prices and interest rates and why does such a relation exist? How does this relationship relate to the term “demand for money”?

b.What is the difference between equities and corporate bonds? Why are the yields on corporate bonds higher than those on US Treasuries?

c.The article also states that “profits are close to a post-war high as a share of GDP.” The implication of the article is that markets eventually mean revert. What will cause such a mean reversion in profits and what are the implications for future return inequities?

Answer 1

1). There existe an Inverde relationship between found prices and Rate of interest. Band prices Rise when Interest rate falls, and Bond pricef falls when Interest rate rise. These exists such relationship because Bones have tired coupon amount, The face value therefore adjusts under tree market theo so that the Relevance and Competence is maintained. "Demand for money" is also inversly related to Interest Rate as when there is a high rate of Interest, more people are tend to invest in bondo and Lesser in cash. Bol difference Between Stocke f Corporate Bonds. BASTS: 0 Meaning STOCKS Instruments which reflect Interest of ownership in exchange of funds. OWNERS corporate Bonde Funds which replicata performance of an Index LENDERS Status Issuer companies gort. Institutions YES NO - Form Dividend but not guaranteed Interest which is a fixed Payment T of Retum

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