Reasons for Volatility
If a bond to a known rate of fixed income, making it fluctuate in value? Several interrelated factors influence the volatility:
Inflation and the time value of money
The first factor is the expected inflation. The bottom / top of inflation expectations, bond buyers are case lower yield or return will be in demand. This is a concept known as the time value of money. The time value of money hinges on the realization of a dollar buy in the future less than a dollar today, because its value is eroded by inflation. To determine the future value of the dollar in today's terms, you have to deduct from its value at the time at a certain speed.
Discount rates and present value
To calculate the value of a particular obligation, therefore, you should discount future payments of the bonds, in the form of interest payments and principal repayments. The higher the expected inflation rate over the discount rate to apply and therefore more current value. Furthermore, the additional payment, the higher the discount rate is applied, resulting in a low current value. Bonus payments are fixed and known, but the environment is constantly changing interest rates of cash flows subject to a discount rate change and therefore this value is constantly fluctuating. Because the flow of the original payment of bail set, the evolution of bond prices will change the current effective yield. As bond prices decrease, increases in throughput, as rising bond prices, the actual performance falls.
The discount rate used is not only a function of inflation expectations. Any risk that the bond issuer may default (not pay interest or repay principal) to call for an increase in the discount rate, which will impact the current value of obligations. Discount rates are subjective, that is, investors will be different by using different rates depending on their expectations and their own specific risk assessment. The present value of obligations is the consensus of all these different estimates.
Yield on bonds is generally fixed and known, but what is the return on stocks? In its purest form, this return of stocks is a well-known free cash flow, but in practice, the market tends to focus on the results reported. These revenues are unknown and variable. They may grow rapidly or slowly, if at all, or reduce or even go negative. Calculate the net present value, you must make the best guess as to what these future earnings will be. To make matters worse, this revenue is not a hard life. They can last for decades and decades. This changes the flow of expected return, looking for a steady evolution of the discount rate. The share prices are more volatile than bond prices, as the present value calculation of the two continuously variable parameters - revenue stream and the discount rate.
Hopefully, you now have a better understanding of why stocks and bonds, behave as they behave. This information should not be placed on better investment decisions more informed. Pricing of all the thousands of stocks and bonds, is fundamentally sound. Market participants apply the cumulative knowledge and best estimates of future inflation, future or unknown risks and revenue streams to arrive at today's valuations. These assessments are constantly fluctuating based on the evolving expectations. In hindsight, that emotion, even as a whole, may cause these expectations and then the assessments are incorrect. For the most part, but they are correct based on what we know at any time.
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