Kosy

iTrader: (2)

Hi there,

I would be really gratefull if any of you could help me with this
little question i got at uni.

Give two scenarios which would raise one (either stocks or bonds) of the prices but not the other.

I need to know within the hour!
Just a 10 word scenario will do.

I just cant work it out because all the scenarios i think of will move both prices

Thanks guys!!

Kosy.

[Edited by Kosy - 4/29/2003 10:17:38 AM]

Kosy

iTrader: (2)

bttt

Scooby-Rob

War:

Stocks fall due to uncertainty of the future months, whilst investors tend to move to bonds e.g: a war bond, they allow the government to borrow for the war, and they hold a more secure return than equities at the time.

Kosy

iTrader: (2)

Cheers Rob..... you are a legend!!!

Anyone for one more?

Kosy

iTrader: (2)

a desperate bttt

merkin

A change in interest rates, will usually have an inverse effect on one versus the other (eg. rate rise, equities fall, bonds rise, and the opposite)

Kosy

iTrader: (2)

Cheers Merkin, but according to the lecturer interest rates change both bonds and stocks at the same time. Im not saying he's right but ill better do what he says!

Thanks though

One more still needed!!

Cheers guys,

Kosy.

fast bloke

They will nearly alway move in different directions.

As above, war and interest rates are the main influences. Consumer spending and property markets have a big influence as well.

(House prices start to drop - property investors sell up and need somewhere safe to put the money. Equities are not safe so they go for bonds until the market levels out)

merkin

Sorry, was reading the question as long as one rises but not the other then thats acceptable answer (i.e. didnt realise the other shouldnt fall)

Another example would be a rating agency change in the debt grade (maybe sovereign ratings if we are talking about generic rather than company bonds) This would change Bond prices, but shouldnt really affect equities one way or the other.

[Edited by merkin - 4/29/2003 11:05:27 AM]

Kosy

iTrader: (2)

Cheers Merkin and Fast Bloke, you guys are spot on!

Excellent scenarios.

Thanks very very much

Scooby-Rob

Glad I could help

But what does Bttt mean??

S55 HOT

BTTT is Back to the top

Also remeber that the examples are generalisations and will not apply to all stocks or bonds equally.

Rating agencies, company results, company news, regulator announcements, competitor results/announcements etc. all affect only one or a few companies

Interest rates, FX rates, consumer spending/borrowing figures, manufacturing output, macro news such as a war, 9/11 etc are the type of things that affect the market as a whole.

Al

S55 HOT

It's also very rare that the price of an individual bond or stock will move significantly without affecting the price of the other.

I can only think of interest rates or FX rates depending on the type of bond - if its anything at all to do with the company or its market conditions incl competitors then it will affect both prices.

merkin

When i gave the examples of ratings agencies, I was referring to Sovereign debt, which would affect the market as a whole (i.e. sweden sovereign is downgraded to bbb+ - bond mkt generally would come off, equity market would take very little note..

Kosy

iTrader: (2)

Yep cheers guys, thats just what i needed
Praise Scoobynet!!

lokokkee

A better scenario would be a deflationary/recessionary environment, when interest rate drops (bond price increase) and equities fall because companies lack the power to increase sales and prices of their goods and services (profits stagnate or fall as a result). Example, in Japan, bond yield is near zero and the Nikkei stock market index is at 20-year low. Getting half percent interest is better than losing money in the stock market.

This is different from a low interest environment with moderate growth and low inflation, when low returns from bonds cause investors to chase after stocks, moving up their prices. In USA, when the Fed cuts interest rate, bond prices move up (yield and price are inversely proportional) and the stock market rallies most of the time. Companies benefit from reduced cost of borrowings and moderate growth in sales.
Note: I should know, two of my former professors went on to win the Nobel Prize in Economics.

[Edited by lokokkee - 4/29/2003 9:59:48 PM]