Income Builder - Why Pay Attention to the Bond Market? |
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Back to Index Interest rates are a key determinant of economic activity. They influence the rate of spending by consumers and businesses, especially for big ticket items. Interest rates have a direct impact on consumer purchase decisions. Mortgage rates establish just how much consumers can afford to pay to purchase a home. Thus, they affect house prices and overall housing construction activity. Interest rates also help set automobile manufacturing production levels and should serve to regulate consumer spending behavior through credit cards. Similarly, interest rates on commercial loans and leases affect spending by businesses on new facilities and equipment. They also influence whether companies will take on ambitious new projects that may not generate positive cash flow for several years. The Federal Reserve plays a key role in determining interest rates on consumer and commercial loans. Through its management of the Federal Funds rate and bank reserve requirements, it has a direct influence on bank lending policies. Its efforts also help to shape the U.S. Treasury yield curve, which is the benchmark off of which all other types of loans are priced. Interest rates have a direct impact on stock prices. In theory, the value of a stock is a function of projected earnings (or dividends) discounted back at a rate that reflects their risk. The choice of a discount rate is influenced directly by the general level of interest rates. Interest rates also affect corporate profits. As a result, understanding interest rate trends can help you assess the relative attractiveness of the overall stock market, as well as individual stocks, Fixed income investing will make you much more aware of the impact of interest rates on the economy. It will also help you to anticipate and respond to interest rate trends. Expanding your attention to the bond market and the various segments within it will therefore give you a better perspective on forces that will affect the performance of your investment portfolio. As a result, it will help to make you a better investor. Back to
Index _________________________________________________________________________________ Originally published February 28, 2008 Stephen P. Percoco © 2008 Lark Research, Inc. All Rights Reserved. Information is carefully compiled but not guaranteed to be free from error. Specific reference to any specific security should never be construed as a solicitation to either buy or sell. Reproduction without permission from the publisher is prohibited. |
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