Question

Investors who bought bonds several years ago enjoyed double-digit yields. These same investors today are complaining loudly about the current low single-digit returns. Are investors that much worse off today? Explain what investors should be considering and how to determine whether they are better off or worse off today than they were several years ago.

• Make your choices based purely on the time value of money

• You can share any life example in the past to justify your choice.

Answer 1

Historically when investors has bought the bonds,they were rewarded with double-digit returns But now these returns are vanishing and that has came to single digits because there has been an increase in the inflation in the economy and there has been an increase in the interest rate into the economy so when there would be a increase in the inflation and interest rate into the economy and when we are pricing the bond then we will be coming at a lower price and the lower return for the bonds because we will be trying to add up with the higher discounting factor and then we will be having a lower price of the bond due to higher discounting factor and higher inflation.

A. When trying to discount the bonds,one should be using a higher bond yield and it would be leading to a lower price of the bond and it does not mean that the investors are making lower rate of return but it has been adjusted according to the growing inflation and the interest rates into the economy so investors are not worse off or better off than the historical investors because the rates of Return of the bond has been adjusted to the inflation and interest rates in the economy and the return of the bonds are constantly stabilizing due to those factors.

If I have to choose one then I will be going with,today's investors who are having a single digit return because there has been lower interest rate regime into the economy and to compensate for that there has been a lower yield on the bonds so I will be trying to go with single digit return for today as it should be representative of current scenario and current interest rate and inflation regime.

B. To provide with an example, when bond yield of long-term bonds are very low due to a crisis in the economy like 2008 crisis the investor should use that opportunity in order to invest into the bonds, in the longer time frame and the economy will be stabilizing the yieldls on those bonds will be going up for an investor, and they will be rewarded with a higher rate of return on their investment in bonds like in 2008 crisis.