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 example public and merit goods preparedness and/or subsidisation - through borrowing from lenders by offspring bonds. In the UK government bonds are known as grand 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 all forms of assets gilts pay a yearbook yield, known as the coupon 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 premium or discount o their par value.

The prices of gilts are determined primarily by touch rates but are also influenced by parole and technical influences.

        Firstly let us examine the answer of a change in interest rates on the price of gilts. This is best explained by a theoretical typeface involving 3 different stocks(1). Suppose that in 2001 the DMO decided to issue 3 stocks with the following details:

        Price         Income Yield         repurchase Yield

Short-dated 4.5% 2003         100         4.5%         4.5%

Medium -dated 4.5% 20010         100         4.5%         4.



5%

Long -dated 4.5% 2025         100         4.5%         4.5%

Suppose that a year later on the UK economy has began to deteriate and that theres evidence of inflation growing, and the US economy, a major importer of our goods, is slumping and investors are demanding higher 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 above at a...

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