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

Investors who have bought bonds several years ago were exposed to lot of uncertainty and under performance of equity markets in previous years but currently it can be seen that there is a high degree of economic stability and equity markets are performing according to the Expectations and there providing high rate of return so there are no influence in the bonds market and Bond markets are also reflecting that in the current economic stable situations, the companies are not providing with higher rate of return as there is a low interest rate regime.

Investors should be considering the level of interest rate and inflation in the economy as well as they should also consider the monetary policy of Federal government along with economic cycle and when there would be a degree of a stability in the economy as they should be looking for equity, rather than bonds.

The return which has been made by these investors are also very low due to the time value of money concept which has led to lower the rate of compounding and which has led to ultimately lower return for the investors so it can be said that investors should have always kept in mind about the interest rates along with the economic cycle and political stability before his investment into a bond Investment.