Can anybody please explain the economics of shares and bonds.?

i want to find out how shares and bonds, their trading etc affects the economy.

a few concepts to remember. here goes:

1) interest rates and bond prices moves in opposite directions (inverse relationship).

when INTEREST RATES RISES, bonds, which offer a fixed amount of money as payout, will FALL in PRICE, because the coupon rate payout by the bond, which was once considered attractive, is now "not ok", because banks are offering higher interest rates.

if you want me to buy your bonds available in the secondary market, then lower the price to compensate for the interest rates.
eg. a bond of $3000 with $30 payout = 1% I.R.
now IR goes up to 5%.
the $30 is fixed as are most coupon rates. to attract buyers, your bond price must go down to $600, then
a bond of $600 with $30 payout = 5% I.R.

another way to look at it is, since the banks are offering better rates now, i will save with them. many people thus sell their bonds, to invest with banks. this is also a cause of the fall in bond prices.

2) bonds and stocks are inverse in relationship.

classical economics viewed savings as supply of loanable funds, and investments as demand of loanable funds. at equilibrium interest rates, demand and supply intersect. its like a normal demand and supply curve.

when i see an opportunity to invest, surely i would want to raise money for it. an option would be to sell bonds, since the stocks might outperform the bonds.
conversely, when the market seems dangerous, i might liquidate my investments and turn to safer bonds.

3) interest rates can affect bonds and stocks inversely too.

when interest rates are high, people would want to save, thus selling off their bonds. at the same time, since interest rates are high, why would people want to take risk? they would then consider savings instead.

that's the basic, yup.
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