Reference no: EM13748440

From the first e-Activity, analyze how the Federal Reserve's decision to keep interest rates low through late-2014 affects the bond market and determine if you are in agreement with this strategy.

The FED keepinginterest rates low encourages borrowing by consumers because it is cheaper to borrow money thus increasing economic activity and stimulating the economy. As we saw lowering interest rates is good for bonds.But when you release those rates bond prices decreases making losses for many bond holders, especially pension funds. Bonds are a form of fixed income investment that generate money for investors through a series of prearranged payments. But binds can also make investors' money as a result of interest rate movement. Bond price move in the opposite direction of interest rates. Any new bonds that's sold isaffected by market force. For instance, when rates go down, new bonds come to market with lower interest rate, making older ones with higher interest rate more valuable.

Describe the relationship between the bond rate and inflation. Then, apply this relationship to advise a small-business owner who wants to start a pension fund for his / her employees. (Students are to provide their own details about the type of small business and employees of that business.)

A key factor that affects bonds is inflation, because if inflation is anticipated to be high, then investors lean towards a greater returns in riskier assets mainly stocks. If the rate of inflation outpaces the return paid on the bond, then the bond investor effectively loses money on the deal even though there is interest being paid. This affects high quality bonds or Investment Grade bonds the most, because have a lower yield. That is way in any case of investing your employees in pension funds you have to look at the inflation rate, because pension funds are regulated and are allowed to invest only in Investment grade or high quality assets.