Banks and other lending institutions use interest rates as a way to make money on loans. When the Federal Reserve raises or lowers interest rates, it can have a significant impact on the economy. The Fed can raise or lower interest rates to try to stimulate or slow down economic growth. Interest rates also affect the stock market, because when interest rates go up, it becomes more expensive for companies to borrow money, which can cause the stock market to go down.
1. Bond prices and interest rates: The price, in general, of a government bond, is inversely related to interest rates. When interest rates fall below a certain threshold, their prices rise, and when they exceed that threshold, the prices are inversely influenced! Bonds have a par – value, which is the price paid, at the end of the term. As a rule, bond markets set these at roughly $1,000 per bond; however, during the duration of a bond’s eligibility, the pricing has the opportunity to be adjusted up or down. Such movement affects liquidity issues with bonds!
2. Mortgage rates: For the last several years, we have marveled over and watched as record-low interest rates prolonged and prospered the real estate market, especially in certain regions, by bending upwards house values! In numerous regions of the country, we are seeing at or near their highest values ever, by a major, dramatic amount! Whenever this rate is low, a buyer is able to purchase a home for much less – his house – for – his – bucks, because, his payments are so low! When the value of this rate eventually increases, consider the possible adverse results and impacts for buyers.
3. Consumer credit: There is no standard financing, or dealerships, like other high or low vehicle pickup/down payment. Rates on credit card debt are lower, in various ways. There are often promotional deals, providing both short term and longer term credit products, as long as they are credit-based, and are allocated to something, which can fluctuate when this value increases.
4. Business borrowing: Another area of influence is the cost of borrowing. After all, their access to cheap – money can help to reduce the costs of borrowing, streamline overhead, purchase inventory, etc. However, what happens when this cost ticks up?
5. Impacts on stock market prices: Until recently, stocks paid by little, compared to dividends, etc., so many have considered the stock market, the only town, where many people have invested. In addition, many companies represented a higher ratio of cost than profit than ever, and we have seen, a higher ratio of cost per share to profit than usual. Alright how long does this last? How high can it climb?
Aside from what you already know, other key factors have an impact on these issues. Primarily, there will be inflation, or the perception of inflation; confidence, or the perception of confidence; politics, or the actions of the government, the Federal Reserve, etc. The more you know, the better prepared you’ll be!