PU Business Article Analysis Bonds as An Asset Class Discussion – Description
DIRECTIONS
Write about a topic or current event that applies to the content in the current unit/module. This may be a current event that exemplifies or applies to the chapter concept(s), or a narrative written piece that relates to the unit concepts. You must have at least one reputable outside source for your written piece (in addition to the textbook). Examples of acceptable sources are Barrons, The Wall Street Journal, Kiplinger, Investopedia, cnnmoney.com, cnbc.com. The source should be current (from the last six months). The article/source is the catalyst for your critical written piece. This is not an assignment where you simply report on an article or current event. You should engage in critical thinking, as the article/source is used to substantiate your point(s). You may choose the topic, but it needs to pertain to a relevant topic from one of the chapters that we are covering in the current unit/module.
UNIT KEY TOPICS
If you are at a loss for a topic, the following are some key topics that you could use for this units (modules) written piece:
Discuss bonds as an asset class from the perspective of the investor. What are the pros and cons of bonds as compared to the other investment (asset) classes?
Discuss the various types of risks inherent in bond trading, as related to the bond market(s) overall, or a particular type of bond, or a specific bond issued by a specific firm.
Student Lisa
1. Discuss bonds as an asset class from the perspective of the investor. What are the pros and cons of bonds as compared to the other investment (asset) classes?
The article “US Treasury Yields Decline” by Palumbo (2023) notes that Wednesday last week was marked by a decline in bond yields following the comments by Jerome Powell, the Federal Reserve Chairman. Powell, at a conference in Europe, noted the central bank’s intention to keep the interest rates higher at least in the foreseeable future to overcome the aggravating inflation. These comments caused the US 2-year Treasury note yields to fall to 4.720 percent while the yields of the 10-year Treasury note declined to 3.75 percent.
The article by Palumbo (2023) highlights another facet of bonds besides the benefits these securities are known for. Bonds are instruments involving a loan extended by an investor to a borrower, typically a corporation or government, that attract a fixed income over its duration (Bodie et al., 2013). The bonds’ aspect of fixed income provides the salient benefit of guaranteed returns, thereby overcoming the fears of high investment risk held by risk-averse or risk-sensitive investors (Bodie et al., 2019). This benefit of low risk is not available in other asset classes such as stocks. Stocks carry high investment risk because their value is pegged on broad economic and company-specific factors (Bodie et al., 2019). However, the high-risk element of stocks is compensated by the expectation of higher returns, a benefit absent in bonds which attract fixed income over the maturity duration. The recent decline in bond yields illustrates the peculiar relationship between bonds and interest rates. The implication of increase in interest rates, as projected by Jerome Powell, is that new bonds will be issued at higher interest payments to investors than the existing bonds. Consequently, the existing bonds will become less valuable and less attractive to investors who will prefer the new bonds that carry higher interest payments. As a result, the price of the existing bonds will decline, although the coupon payments remain unchanged (Bodie et al., 2019). However, a decline in the price of a bond renders it cheaper from the perspective of potential investors. The bond’s yield will subsequently increase since a potential investor now expects a higher return from buying such a bond. Therefore, although bond returns are fixed, unlike stock returns in the form of dividends that are not assured, as far as bond prices are concerned, they carry a market risk tied to changes in interest rates.
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