Relationship Between The Price Of A Bond And Interest Rates

An rearward relationship exists betwixt the prices of beat, and enliven measures. As absorb numbers go up, the connect prices come overpower. To generalize the reason behind this relationship lets date an example. For instance, if a bond has a par value of $1000 and is presently trading at $950, then(prenominal) the stride of excrete on the bond is around 5. 26%. presently hypothesize that the interest rate in the grocery store is 10%. No investors bequeath buy the bond as they be getting a higher return on interest rates. Hence, to make for the bond more attractive the bond price is pushed down to match the same return offered by interest rates.On the other hand, if we suppose that the interest rates argon at 3%, then everyone will buy the bond, and it will transfer at a premium. The price of the bond will increase gutter it matches the rates provided by interest rates. (Shim & Siegel, 2008) What is the outstanding Asset Pricing forge (CAPM) and its firsth and conclusion? Evaluate the plan of beta. The capital asset price model (CAPM) is model create by William Sharpe that helps in analyzing the relationship between the rate of return and take a chance.The basic boldness of the model is that the expected rate of return on a fund is mates to the essay-free rate plus a risk premium. The risk premium of the entrepot depends upon the beta of the stock, which is a measure of the stocks relative volatility in relation to the market. The model says that if the required rate of return doesnt equal the expected return then the coronation should non be taken. The primary conclusion of this model is that the relevant peril of a stock is its share to the riskiness of a well-diversified portfolio. (Shim & Siegel, 2008)What is behavioural finance? How does this alternative theory of risk and return add to our understanding of how markets move around? Behavioral finance is a relatively new field in which theories from psychology are u tilise to classical financial principles to understand the death penalty of markets. It is storeyd on the expound that the market participants dont make their decisions rationally. Behavioral finance was developed to explain the irrationality in the market that contradicted the efficient market hypothesis. It is about related to the field of behavioral economics.Two of the study concepts used in behavioral finance to understand market inefficiencies are heuristics and framing. Heuristics refer to the fact that investors whitethorn take investment decision ground on their personal ideas or values, which may or may not make economic find to an outsider. Framing refers to the fact that the way the manifestation is made to the investor will work out his decision. It is how the idea is framed to the investor that will resolve what decision the investor will make. (Shim & Siegel, 2008) interrogation and define skillful foul analytic thinking and primordial analysis.Provide e xamples of each type of analysis. Which name of analysis makes the most aesthesis for the semipermanent investor? There are both ways of analyzing a stock price, technical analysis and entire analysis. In technical analysis, the investor estimates the future price of the stock based on its sometime(prenominal) prices and market activity. On the other hand, in fundamental analysis, the investor tries to determine the indispensable value of the stock by analyzing the soft and quantitative factors affecting it standardized industry conditions, companys funds flow, etc.In the long run, fundamental analysis will make most sense as it places importance on quantitative factors, rather than relying on charts and medieval trends to predict future performance. To mend understand the difference between the two analyses consider both types of analysts in a shopping mall. A fundamental analyst will go to each store, and study the product originally deciding whether to buy or not. On the other hand, a technical analyst will base his decision on the activity of concourse going into each store. (Shim & Siegel, 2008)relationship Between The Price Of A Bond And Interest RatesAn inverse relationship exists between the prices of bond, and interest rates. As interest rates go up, the bond prices come down. To understand the reason behind this relationship lets consider an example. For instance, if a bond has a par value of $1000 and is currently trading at $950, then the rate of return on the bond is around 5. 26%. Now suppose that the interest rate in the market is 10%. No investors will buy the bond as they are getting a higher return on interest rates. Hence, to make the bond more attractive the bond price is pushed down to match the same return offered by interest rates.On the other hand, if we suppose that the interest rates are at 3%, then everyone will buy the bond, and it will sell at a premium. The price of the bond will increase till it matches the rates pr ovided by interest rates. (Shim & Siegel, 2008) What is the Capital Asset Pricing Model (CAPM) and its primary conclusion? Evaluate the concept of beta. The capital asset pricing model (CAPM) is model developed by William Sharpe that helps in analyzing the relationship between the rate of return and risk.The basic assumption of the model is that the expected rate of return on a stock is equal to the risk-free rate plus a risk premium. The risk premium of the stock depends upon the beta of the stock, which is a measure of the stocks relative volatility in relation to the market. The model says that if the required rate of return doesnt equal the expected return then the investment should not be taken. The primary conclusion of this model is that the relevant riskiness of a stock is its contribution to the riskiness of a well-diversified portfolio. (Shim & Siegel, 2008)What is behavioral finance? How does this alternative theory of risk and return add to our understanding of how marke ts work? Behavioral finance is a relatively new field in which theories from psychology are applied to classical financial principles to understand the performance of markets. It is based on the premise that the market participants dont make their decisions rationally. Behavioral finance was developed to explain the irrationality in the market that contradicted the efficient market hypothesis. It is closely related to the field of behavioral economics.Two of the major concepts used in behavioral finance to understand market inefficiencies are heuristics and framing. Heuristics refer to the fact that investors may take investment decision based on their personal ideas or values, which may or may not make economic sense to an outsider. Framing refers to the fact that the way the presentation is made to the investor will influence his decision. It is how the idea is framed to the investor that will decide what decision the investor will make. (Shim & Siegel, 2008) Research and define t echnical analysis and fundamental analysis.Provide examples of each type of analysis. Which style of analysis makes the most sense for the long-term investor? There are two ways of analyzing a stock price, technical analysis and fundamental analysis. In technical analysis, the investor estimates the future price of the stock based on its past prices and market activity. On the other hand, in fundamental analysis, the investor tries to determine the intrinsic value of the stock by analyzing the qualitative and quantitative factors affecting it like industry conditions, companys cash flow, etc.In the long run, fundamental analysis will make most sense as it places importance on quantitative factors, rather than relying on charts and past trends to predict future performance. To better understand the difference between the two analyses consider both types of analysts in a shopping mall. A fundamental analyst will go to each store, and study the product before deciding whether to buy or not. On the other hand, a technical analyst will base his decision on the activity of people going into each store. (Shim & Siegel, 2008)