Examine the effects of a change in interest rates on the price of equity and Government bonds. Briefly explain what other major factors affect the price of equity. 1911 Words

Governments of countries finance many of their activities - for voice public and merit goods prep atomic number 18dness and/or subsidisation - through borrowing from lenders by reachoff bonds. In the UK government bonds are known as gigabyte march on securities and are referred to as gilts. Responsibility for them is managed by the Debt wariness Office (DMO) which is an executive agency of the Treasury.. They advise on debt write outs and form the auctions of gilts on behalf of HM Treasury. As with on the whole forms of assets gilts pay a yearbook yield, known as the voucher in the gilt edged market. However the coupon isnt a perfect guide to the involvement rate the Government had to pay when they issued the gilt because stocks are sometimes issued at a grant or discount o their par value. The prices of gilts are resolute primarily by touch rates but are also influenced by parole and technical influences.         Firstly allow us examine the answ er of a change in interest rates on the price of gilts. This is best explained by a theoretical typeface involving 3 different stocks(1). call back that in 2001 the DMO decided to issue 3 stocks with the following dilate:         Price         Income Yield         repurchase Yield Short-dated 4.5% 2003         century         4.5%         4.5% Medium -dated 4.5% 20010         100         4.5%         4.

5% Long -dated 4.5% 2025         100         4.5%         4.5% mean that a year later on the UK economy has began to deteriate an d that theres turn out of inflation growing! , and the US economy, a major importer of our goods, is slumping and investors are demanding higher(prenominal) yields to compensate. If the DMO wanted to issue a bran-new gilt at this point they would have to offer a yield of, for example 6%, to persuade investors to get. Its clear that investors wouldnt buy the 3 stocks supra at a... If you want to get a full essay, fix up it on our website: OrderEssay.net

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