Question

Discuss 2 reasons for the discrepancy between the expectations and the actual change in market price for the bonds.

Answer 1

Discrepancy between expectation and the actual change in the market price of bonds are as follows--

A. The macro environment of the economy cannot be predicted in advance and macro environment of the economy would be including factors like inflation and interest rates and other monetary policy measures for to be impacting the the movement of the bond prices and these economic moments can never be predicted in advance because they are beyond the control of any company and government so there would be a discrepancy between the expectation and the actual change in market price

B. Another reason for discrepancy between the actual price and the market price would be that because there would be a higher level of Corporate default arising on these bonds due to higher level of credit risk and default risk and lower credit ratings, so the value of the bonds will not be matching with the actual market price because market is futuristic in nature and they would be trying to discount these bonds with the expectation of the defaults

So, it can be summarised that the value of the bonds and the price of the bonds are two different things and price of the bonds will often be based upon the sentiments in the market so the actual price of the bonds will not be reflected into the marketplace always.