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Umass Money And Banking Essay 1

871 words - 4 pages

Econ 311 Essay #1

Investment in U.S. stocks and in U.S. treasury bonds makes up for a large portion of investment assets in the United States economy. The main difference between the two asset classes is that stocks are a form of equity investments which represents ownership in a company for the investor, and bonds are debt investments from which the investor earns interest on from the bond issuer. Both forms of investment assets correlate with each other in terms of prices increasing and decreasing over periods of time. Stock market prices and Treasury bond prices both fluctuate due to changes in different economic factors. Factors in the economy sometimes moves stock and ...view middle of the document...

Bond prices and stock prices both vary due to their own specific factors and often times this causes the prices of both stock and bonds to move in opposite directions. There are specific reasons for the rising of stock prices while bonds fall vice versa. In the situation of stocks prices rising and bond prices falling economic activity and growth is at a high level and companies are able to increase prices while selling more products and increasing their overall profits. Investors take advantage of a booming economy and sell their bonds to buy stocks. Also governments may see the high level of economic activity as inflation and create policies to slow economic growth, one common tool being to raise interest rates. The increased interest rates cause bond prices to fall and thus as the stock market rises, bond prices fall.

The situation of bond prices rising and stock prices falling can also take place in the economy. This situation most commonly takes place in a time of economic uncertainty where there is a chance of decrease in economic activity. The economic uncertainty causes fear in investors and in turn leads them to investing safely in high quality bonds. As more people continue moving their money from stocks into bonds, stock prices begin to fall. The increase in bond demand causes bond prices to increase and interest rates to fall and in turn economic uncertainty cause an increase in bond prices and decrease is stock prices.

While stock prices and bond prices often move in different...

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