Umass Money and Banking Essay 1

In: Business and Management

Submitted By braves08ftball31
Words 871
Pages 4
Econ 311 Essay #1

Investment in U.S. stocks and in U.S. treasury bonds makes up for a large portion of investment assets in the United States economy. The main difference between the two asset classes is that stocks are a form of equity investments which represents ownership in a company for the investor, and bonds are debt investments from which the investor earns interest on from the bond issuer. Both forms of investment assets correlate with each other in terms of prices increasing and decreasing over periods of time. Stock market prices and Treasury bond prices both fluctuate due to changes in different economic factors. Factors in the economy sometimes moves stock and bond prices in opposite directions yet it also sometimes moves them in the same direction depending on the current situation taking place in the economy.

Bond and stock prices are both affected by different things in the economy. Bonds are affected most greatly by interest rates and in turn are a function of current market interest rates. The prices for which bond issuers sell bonds for are correlated with the interest rates of the bonds. When interest rates rise it causes the prices of bonds to fall and vice versa in order to make bonds attractive for investors to buy. While many different economic factors affect interest rates in the economy, bond prices are most directly affected by the increase and decrease of interest rates.

Stock prices are affected differently than bond prices. One factor that affects stock prices is supply and demand in the economy. If more people want to buy stocks than sell them, then the prices of stocks will increase due to higher demand and vice versa. Stock prices are also affected in ways determined by how much investors think a company is worth or how much growth investors expect from the company in the future. If the economy is…...

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