NYSE
Name
Institution
Interest risk is a risk that comes up when bond owners experience fluctuating interest rates. The amount of interest rate on a given bond relates to the sensitivity of the price in relation to fluctuations that occur in the market. Moreover, the sensitivity of the changes is often based on two factors. These are the average time it takes for the bond to mature and the coupon rate assigned to the bond.
As the average interest rates increase, the cost of borrowing should become more expensive. The interest rates, therefore, have an inverse relationship to the bond prices. In other words, when the bond prices fall, the interest rates should rise and vice versa. The federal government could hike interest rates at least in H2 2018 because the average inflation rate has been on the rise. More so, a second rate increase on the H2 may occur, but it’s mostly related to the information on inflation. A rise in the interest rates will also cause the earnings and stock prices to drop. On the contrary, when the interest rates fall, this will cause consumers and businesses to increase their spending. As a result, the stock prices to rise.
The government debt and deficits are likely to have a significant impact on the interest rate forecasts. In particular, the government’s debts are likely to cause an increase in almost every aspect of the financial sector. This might include credit cards, mortgages, taxation, and others. While these changes are often marginal, they accumulating effect of these changes should cause some concern. Also, an increase in the deficit might also lead to the phenomenon of crowding out. This refers to when the total government expenditure or a decrease in the government revenues causes an increase in the overall budget deficit. In this case, the treasury often has to issue additional bonds. As a result, this causes the prices of the bonds to reduce, thereby increasing the interest rate. A higher exchange rate causes a decrease in the net exports.