Stock Market and Bond Market in the U.S.

COMPARING AND CONTRASTING THE STOCK MARKET AND THE BOND MARKET IN THE UNITED STATES

This research compares and contrasts the stock market and the bond market in the United States from the perspective of the investor. The assessment discusses advantages and disadvantages of each class of securities.

There are several barometers used to describe stock market activity in the United States. The most widely known of these barometers is the Dow Jones Industrial Average of 30 stocks. There are other Dow Jones index averages, utilities and transportation as examples, and there are other indexes, such as such as the Standard and Poors 500, the Wilshire 5000, the NASDAQ, and others. The Dow Jones Industrial Average is easily the most recognizable stock market measure to most people. While the Dow Jones Industrial Average is not as representative of the market generally as are some other indexes, the pattern of movement in the Dow Jones Industrial Average has been found to correlate well with the pattern of movement of other measures of stock market activity in the United States.

Both stock prices and bond prices in the securities markets in the United States tend to be volatile. The volatility of these markets creates risk for the investor. Further, the stock market and the bond market frequently respond different to financial, economic, and political stimuli (Reilly, Wright, & Chan, 2000). Investors, thus, need to know how the two classes of investment vehicles differ from

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es in market interest rates. The character of the relationship tends to follow an inverse pattern, e.g., as market interest rates move up, the price of a bond moves down, and as market interest rates move down, the price of a bond moves up. This situation tends to make the price of a bond dependent upon the instrument's prevailing yield. Yield at any given date, thus, tends to be the principal measure used to compare bonds with diverse coupon interest rates and yield-to-maturity periods (Daves & Ernhardt, 1993). Thus, while bond price volatility is in part a function of market interest rates, bond price behavior is also a function of coupon interest rates and term-to-maturity periods as functions affecting bond yield. Two approaches to yield determination for bonds predominate current yield and promised yield. A bond's current yield is the amount of current income that a bond provides (annual interest) relative to its prevailing market price. Promised yield, by contrast, includes both interest income, price appreciation or depreciation, and total cash flow received over the life of the instrument in the bond valuation process. The promised yield is a function of the present value concept. Thus, the promise yield of a bond

Category: Economics - S