Question

In chapter 6, we explored how to value bonds. If all investors are using this method, why does the same bond buy or sell at different prices? In other words, why is there a market for bonds? Why do some financial analysts treat preferred stock as a special type of bond, rather than as an equity security? Include in your discussion the relationship between bond prices and interest rates.

Answer 1

The bond market is the largest traded market in the world. The buying and selling of the bond happen because of the change in interest rate.

Now, let's take an example:

Suppose the interest rate prevailing in the market is 4% and the yield of the bond is 5%, now if the fed decides to cut the interest rate then the demand for the bond will go high because it will fetch more yield than the yield prevailing in the market, as a result, its price increases and hence there is market for the bonds. People speculate the interest rates movement depending upon the economic condition and they bet on them via bonds hence the bonds are traded.

Preferred stock has both the qualities of bond and equity. Preferred stockholder gets the continues dividends on the earnings of the issuer and hence those can be considered as a coupon for the bond hence financial analysts treat preferred stock as bond.