How does inflation affect fixed-income investments?

July 7, 2024 No Comments

A: Inflation is typically defined as a sustained increase in the price level of goods and services. There is no widespread consensus on the primary cause of inflation, but most economists agree that certain mechanisms in the economy, mainly commodity price increases and currency depreciation,

How does preferred stock differ from company issued bonds?

July 7, 2024 No Comments

A: Preferred stock is a special kind of equity ownership, while bonds are a common form of debt issue. Many consider preferred stock an investment that lands in between common shares and bonds. Despite many similarities, preferred stock is generally riskier than a bond and

How does quantitative easing in the U.S. affect the bond market?

July 7, 2024 No Comments

A: It is not entirely understood just how much, or even in what direction, the Federal Reserve’s quantitative easing, or QE, program affects the bond market. Simple market theory, based on increased demand from homogeneous buyers, should predict that the Fed’s purchase programs suppress bond

How does TARP affect the economy?

July 7, 2024 No Comments

A: TARP – or the Troubled Asset Relief Program – is a government program created in response to the subprime mortgage crisis that began in 2007. The original goal of the program was to give the U.S. Treasury $700 billion in purchasing authority to buy

How does the money from the interest on my bond get to me?

July 7, 2024 No Comments

A: When you buy a regular coupon bond, you are entitled to a coupon, which is typically paid at regular intervals, and the face value of the bond (the amount you initially invested), which is typically paid upon maturity. Most coupons are paid on a

How is a corporate bond taxed?

July 7, 2024 No Comments

A: A corporate bond is taxed through the interest earned on the bond, through capital gains or losses earned in the early sale of the bond, and through an original issue discount. The aggregate taxes owed on each of these components adds up to equal

How is a debenture stock different from a regular debenture?

July 7, 2024 No Comments

A: Private businesses and governments sometimes issue debt securities to raise additional capital. These debt instruments are called debentures whenever they are not secured by any form of collateral. Debentures, which otherwise act much like any other kind of bond, are ostensibly only backed by

How is bond yield affected by monetary policy?

July 7, 2024 No Comments

A: Bond yields are significantly affected by monetary policy. Monetary policy at its core is about determining interest rates. In turn, interest rates define the risk-free rate of return. The risk-free rate of return has a large impact on the demand for all types of

How is convertible bond valuation different than traditional bond valuation?

July 7, 2024 No Comments

A: Convertible bonds have features of equity securities since they can be conditionally converted into shares. This makes them more sensitive to company-specific news and less sensitive to systematic economic conditions, at least when compared with traditional bonds. The valuation of a convertible bond must

How Is Par Value Affected When a Bond Price Falls?

July 7, 2024 No Comments

A: When you buy a bond, you are loaning money to the issuer. Since a bond is a loan, the interest paid to the bondholder is payment for lending the money. The interest payable is stated as a percentage of the amount borrowed, known as the

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