Question

1. Is deflation bullish or bearish for the bond market? Explain your answer by showing which terms in the yield to maturity formula are affected and how these change.

2. Outline the ways in which FED easing affects the yield curve. Is it possible for an increase in the real money supply (FED easing) to actually have exactly the opposite effect? Explain the basis of why this is or isn’t possible.

Answer 1

Bear market refers to the market where share prices are continuously declining.Ads downward trend Max investors believe that the trend will continue which in turn perpetuates the downward spiral. It is considered risky to invest in a bear market. As many equities lose value. 10 most investors withdraw their money from the markets. During a bear market the economy slows down and unemployment rises as companies begin laying off workers.

Bull market:-
A bull market refers to a market that experiences a a sustained increase in market share prices. it insurance investors that the trend will continue over the long term. Its signifies that the country's economy is strong and employment level are high.
In a bullish market the outlook of the investor is very optimistic and this is visible from the fact that investors will be taking long positions in the market. This way the anticipation is is security prices will rise further and investor has an opportunity to maximize profit opportunities. Conversely in a bearish market the market sentiment is quite pessimistic and reflected by investors taking a short position i.e selling a security or undertaking a foot position with increased anticipation of a falling market. Hence if the price falls below the contracted price the option holder will accordingly book a profit.

In a bullish market the yields on securities and dividend will be low highlighting the financial strength of the investor and security others can receive on investment made whereas in a bearish market these yields shall be very high indicating requirement of funds and attempting to lure investors by offering higher yields on securities at a later date.