ECONOMICS
ECONOMIC DEVELOPMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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They are easily the most widely followed financial markets
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They are the markets where interest rates are determined
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They are the markets where foreign exchange rates are determined
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All of the above
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Detailed explanation-1: -The bond markets are important because they are the markets where interest rates are determined. The bond market broadly describes a marketplace where investors buy debt securities that are brought to the market by either governmental entities or publicly-traded corporations.
Detailed explanation-2: -The degree to which a bond’s price will change given any shift in interest rates is calculated by assessing the present value of the bond’s future cash flows. This is because traders use a method known as discounted cash flow to value a bond according to the future returns that they could expect.
Detailed explanation-3: -The bond market can help investors diversify beyond stocks. Some of the characteristics of bonds include their maturity, their coupon (interest) rate, their tax status, and their callability. Several types of risks associated with bonds include interest rate risk, credit/default risk, and prepayment risk.
Detailed explanation-4: -This is a function of supply and demand. When demand for bonds declines, issuers of new bonds must offer higher yields to attract buyers, reducing the value of lower-yielding bonds already on the market. This environment hit bondholders hard in 2022. Interest rates tend to follow long-term growth and inflation trends.
Detailed explanation-5: -A fundamental principle of bond investing is that market interest rates and bond prices generally move in opposite directions. When market interest rates rise, prices of fixed-rate bonds fall. this phenomenon is known as interest rate risk.