Question

There is discussion now that the new fed chairman has a very loose/liberal money policy given the COVID 19, what do you think would the effect of such policy on the time value of money and value of stocks versus bonds. Would you be interested in investing more in stocks or bonds as a result of such a policy and should that be a function of your age?

Answer 1

Monetary policy, or liberal money policy, the demand side of economic policy, refers to the actions undertaken by a nation's central bank to control money supply to achieve macroeconomic goals that promote sustainable economic growth.

1. Monetary policy, the demand side of economic policy, refers to the actions undertaken by a nation's central bank to control money supply to achieve macroeconomic goals that promote sustainable economic growth.

2. Monetary policy can be broadly classified as either expansionary or contractionary.

3. Monetary policy tools include open market operations, direct lending to banks, bank reserve requirements, unconventional emergency lending programs, and managing market expectations (subject to the central bank's credibility).

               The time value of money (TVM) is the concept that money you have now is worth more than the identical sum in the future due to its potential earning capacity. This core principle of finance holds that provided money can earn interest, any amount of money is worth more the sooner it is received. TVM is also sometimes referred to as present discounted value. The time value of money draws from the idea that rational investors prefer to receive money today rather than the same amount of money in the future because of money's potential to grow in value over a given period of time.

1. Time value of money is based on the idea that people would rather have money today than in the future.

2. Given that money can earn compound interest, it is more valuable in the present rather than the future.

3. The formula for computing time value of money considers the payment now, the future value, the interest rate, and the time frame.

4. The number of compounding periods during each time frame is an important determinant in the time value of money formula as well

Bond valuation is a technique for determining the theoretical fair value of a particular bond. Bond valuation includes calculating the present value of a bond's future interest payments, also known as its cash flow, and the bond's value upon maturity, also known as its face value or par value. Because a bond's par value and interest payments are fixed, an investor uses bond valuation to determine what rate of return is required for a bond investment to be worthwhile.

1. Bond valuation is a way to determine the theoretical fair value (or par value) of a particular bond.

2. It involves calculating the present value of a bond's expected future coupon payments, or cash flow, and the bond's value upon maturity, or face value.

3. As a bond's par value and interest payments are set, bond valuation helps investors figure out what rate of return would make a bond investment worth the cost.

A stock is a stake of ownership in a company that is sold off in exchange for cash. A stock is a security in that company that can also be referred to as equity or a share.

                                      When a company goes to sell a stock (companies issuing stock for the first-time issue Initial Public Offerings, or IPOs), they decide to sell a certain amount of shares of ownership in their company that they will give up in exchange for cash from investors. The investors will then have part ownership in the company and will be able to sell or trade their stock (on the stock market) to other investors to make profits (or take losses if the company is doing poorly).

   Bonds are fixed-income investments, which operate off of a fixed interest rate and a fixed amount of time wherein the company, government, or other will repay the money plus the interest (the interest rate is called a coupon rate) to the creditor (at the point of maturity). For this reason, bonds are frequently called "fixed-income securities," which, as the name suggests, may be more dependable (in theory) than investing in stocks.

                            While stocks are a stake of ownership in a company, a bond is a debt that the company or entity enters into with the investor that pays the investor interest on that debt. Essentially, bonds are IOU's that companies enter into with investors on the pretense that they will repay the money lent in full with regular interest payments

However, bonds can be issued by a company, a city, or a government (in the case of government bonds), and are generally considered a lower-risk option compared to stocks. Bonds are created when a company, government, or other entity wishes to raise money to finance a project, growth, or development and wish to use investors instead of a bank to create loans.

                             Bonds are debts while stocks are stakes of ownership in a company. Because of the nature of the stock market, stocks are often riskier short term, given the amount of money the investor could lose virtually overnight. However, long term, stocks have historically proved to be very valuable.

                                    On the other hand, bonds often operate off of fixed interest rates that the entity buys from the investor, which will frequently pay out annual interest rates to investors while repaying the amount in full at a given time. For this reason, bonds are generally considered a safer investment in the short term or for new investors.

1. Stocks offer the potential for higher returns than bonds but also come with higher risks.

2. Bonds generally offer fairly reliable returns and are better suited for risk-averse investors.

3. For most investors, diversifying portfolios with a combination of stocks and bonds is the best path towards achieving risk-mitigated investment returns.

                                          Stocks are essentially ownership stakes in publicly-traded corporations that give investors an opportunity to participate in a company's growth. But these investments also carry the potential of declining in value, where they may even drop to zero. In either scenario, the profitability of the investment depends almost entirely on fluctuations in stock prices, which are fundamentally tied to the growth and profitability of the company.

                                    A bond is a fixed income instrument that represents a loan made by investors (known as "creditors" or "debt holders") to borrowers, which are typically corporations or governmental entities. Also known as coupons, bonds are characterized by the fact that the ultimate payouts are guaranteed by the borrower. With these investments, there is a concrete maturity date, upon which the principal is repaid to investors, along with interest payments attached to the interest rate that existed at the onset of the loan. Bonds are used by corporations, states, municipalities, and sovereign governments to finance a multitude of projects and operations. That said, some bonds do carry the risk of default, where it is indeed possible for an investor to lose his or her money. Such bonds are rated below investment grade, and are referred to as high-yield bonds, non-investment-grade bonds, speculative-grade bonds, or junk bonds. Nevertheless, they attract a subset of fixed income investors that enjoy the prospect of higher yields.