Question

In: Finance

Would you be more or less willing to buy AT&T long term bonds if A bear...

  1. Would you be more or less willing to buy AT&T long term bonds if
    1. A bear market is expected for stocks,
    1. Interest rates will rise
    1. The Fed announces they will spend up to $50 billion to buy corporate bonds such as AT&T’s?

Solutions

Expert Solution

A) Bear market is expected for stocks:

In such a scenario, I would like to purchase bonds of AT&T because

1) The potential risk reward ratio on that bonds could be very good

2) AT&T is a stable company with a good credit rating and the chance of its default will be very low

B) When interest rates risse

Once rates rise, income producing assets will suffer price losses. This is because bond prices and interest rates are inversely related. So as rates rise and investors are able to get higher rates in the market, the bonds you hold will fall in price to make up for the yield difference.

In that case, if i expect the yield curve to soften in the future, then I would surely buy the bonds only if they are available at a good price

C) Fed buying bonds

I would like to stay away and not buy bonds, because due to the supply and demand dynamics, the price of those bonds might rise which will have a negative impact on the yield


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