Consumer Investments
Bonds: Economic Factors that Affect Earnings
Bond prices in the financial markets are inversely proportional to prevailing interest rates, which means if interest rates go up, bond prices go down, and vice versa, if interest rates go down, bond prices go up.
Along with current rates, the future projection of interest rates also affects bonds in that higher expected future rates increase the current demand for long-term bonds, and lower expected future interest rates decreases the current demand for those long-term securities. (The investor does not want to be locked into an interest rate that can reduce long-term overall profits on their portfolios.)
Projections of the future rate of inflation also affects the current demand for long-term bonds. An expected decrease causes the demand for bonds to increase and vice versa. Inflation affects the value of real return on bond investments, and long-term bonds are especially vulnerable to the inflation rate, with the increasing risk coinciding with time to maturity. Stated simply, the longer the time to maturity on a bond, the higher the interest rate risk.
