Question

1. The economy and markets got whacked from the covid mania and you feel the markets are settling down after a major freefall.   You see the bond of Ford motor company that went from $1,100 down to $680 and now you can buy it for $780. Why did it bounce and why should you buy it?

Answer 1

Increase or decrease in the bond price depends on various factors like economic factors, industrial factors, Inflation and interest rate fluctuatuions and changes happening within the entity and so on.

In the above scenario, Price of the ford motor company's bond was previously $1100. Due to covid, the price had fallen down to $680. There can be many reasons for the above scenario. Some of the reasons can be as follows.

1. Due to covid, all the factory setup had been locked down for so many days, which resulted in stoppage of production, sales and resulting revenue, which in turn effected the expectations of bond holders leading to reduction in the price of the bond.

2. Due to uncertainity of the time period which is required to come back to normal scale of production and sales and capability of company to deal with covid crisis, bond price had reduced to $680.

3. There is a theory telling that market forces will restore to normal after a time gap. Arbitarge cannot be done for a longer period because of demand and supply forces acting inversely. Hence, as part of measure of restoring the market, the price of ford company's bond increased to come back to normal market prices.

4. And also as the covid condition is being tackled properly by most of the territories, it increased the belief of investors and bond holders, which in turn increased the demand for bond leading to increase in bond price.