stock/bond question

[Sperk]

are there any DUers educated in the working of the stock market? I was wondering what generally happens to bond prices when stock prices fall?

thanks in advance

[mudesi]

1. When stocks fall, government bonds rise

Corporate bonds, however, are a different story.

[texastoast]

2. Bonds go up n/t

[wakemeupwhenitsover]

3. Bonds go up.

And when interest rates rise, bonds go down. When interest rates drop, bonds go up.

[Nite Owl]

4. Depends on why stocks are going

down. Ususally bonds rise in place of stocks but if there is stagflation, when the economy is bad but inflation is very high then interest rates would be high too. If interest rates are high then the price of the bond is low.

[Yupster]

5. As an aside

Many times when people say bonds are going up, they are using incorrect lingo. They often mean bond interest rates are going up, which is not what the term "bonds are going up" means.

Bonds are going up means bond prices are going up, not interest rates.

To make things more confusing, when bond interest rates go up, prices on existing bonds go down.

As an example, suppose I have a $ 10,000 - 20 year bond paying a dividend of 6 % a year.

Now suppose the stock market crashes 25 % in a month. What happens to the value of my bond?

It will go up for two reasons.

1. Some people will be scared and want to flee the stock market and will offer me more than $ 10,000 for my bond just to get a safer investment. Perhaps I would be able to sell my $ 10,000 bond to someone else for $ 10,700.

2. Fearing a coming recession, the Fed may cut interest rates aggressively to get people to put more stuff on credit cards and buy more SUV's. New bonds may be issued for 5 % interest, so people would rather give me $ 10,800 to get my 6 % bond than pay $ 10,000 for a new 5 % bond. That again makes the value of my bond go up.

How's that for more than anyone would want to know about bonds?

[bbinacan]

6. But for the real return on bonds

you need to look at yield to call and yield to maturity to get an accurate total return.

[Sperk]

7. by george, I think I've got it! Thanks for the info

I guess we're keeping our retirement funds in bonds for a while.

[upi402]

8. DU Economics forum is great!

http://www.democraticunderground.com/discuss/duboard.php?az=show_topics&forum=114

[A HERETIC I AM]

9. Investopedia is a great resource. Here's their page on bonds....

"Bond Basics" and related information;
http://www.investopedia.com/university/bonds/

Here's their page on stocks;
http://www.investopedia.com/university/stocks/

The following is an excerpt from the "Bond Basics:Yield, Price and other Confusion" page;

Measuring Return With Yield
Yield is a figure that shows the return you get on a bond. The simplest version of yield is calculated using the following formula: yield = coupon amount/price. When you buy a bond at par, yield is equal to the interest rate. When the price changes, so does the yield.

Let's demonstrate this with an example. If you buy a bond with a 10% coupon at its $1,000 par value, the yield is 10% ($100/$1,000). Pretty simple stuff. But if the price goes down to $800, then the yield goes up to 12.5%. This happens because you are getting the same guaranteed $100 on an asset that is worth $800 ($100/$800). Conversely, if the bond goes up in price to $1,200, the yield shrinks to 8.33% ($100/$1,200).

Yield To Maturity
Of course, these matters are always more complicated in real life. When bond investors refer to yield, they are usually referring to yield to maturity (YTM). YTM is a more advanced yield calculation that shows the total return you will receive if you hold the bond to maturity. It equals all the interest payments you will receive (and assumes that you will reinvest the interest payment at the same rate as the current yield on the bond) plus any gain (if you purchased at a discount) or loss (if you purchased at a premium).

As a poster above suggests, when there is a 'Rally on the Bond Market" it is usually as a result of investors seeking a more secure place to invest money when steep declines or market volatility come into play.