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Investing at feedlot
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<blockquote data-quote="MF135" data-source="post: 844451" data-attributes="member: 14057"><p>WRONG AGAIN! You are still heavily exposed to <strong>Interest Rate risk</strong>. As interest rates rise, the value of fixed-income securities fall and vice versa. The rationale is that as interest rates increase, the <strong>opportunity cost </strong>of holding a fixed-income security decreases since you are able to realize greater yields by switching to other investments that reflect the higher interest rate. For example, a 5% bond is worth more if interest rates decrease since you receive a fixed rate of return relative to the market, which is offering a lower rate of return as a result of the decrease in rates. </p><p></p><p></p><p></p><p>The Fisher (or whoever :lol2: :lol2: ) equation estimates the relationship between <strong>nominal</strong> and <strong>real</strong> interest rates under inflation. Say your bank pays you 5% per year on the funds in your savings account. If the inflation rate is currently 3% per year, then the <strong>real return </strong>on your savings today would be 2%. Even though the nominal rate of return on your savings is 5%, the real rate of return is only 2%, which means that the real value of your savings only increased by 2%. As the duration lengthens, inflationary risk increases as the average inflation rate over the term is subject to more uncertainty. :mrgreen:</p></blockquote><p></p>
[QUOTE="MF135, post: 844451, member: 14057"] WRONG AGAIN! You are still heavily exposed to [b]Interest Rate risk[/b]. As interest rates rise, the value of fixed-income securities fall and vice versa. The rationale is that as interest rates increase, the [b]opportunity cost [/b]of holding a fixed-income security decreases since you are able to realize greater yields by switching to other investments that reflect the higher interest rate. For example, a 5% bond is worth more if interest rates decrease since you receive a fixed rate of return relative to the market, which is offering a lower rate of return as a result of the decrease in rates. The Fisher (or whoever :lol2: :lol2: ) equation estimates the relationship between [b]nominal[/b] and [b]real[/b] interest rates under inflation. Say your bank pays you 5% per year on the funds in your savings account. If the inflation rate is currently 3% per year, then the [b]real return [/b]on your savings today would be 2%. Even though the nominal rate of return on your savings is 5%, the real rate of return is only 2%, which means that the real value of your savings only increased by 2%. As the duration lengthens, inflationary risk increases as the average inflation rate over the term is subject to more uncertainty. :mrgreen: [/QUOTE]
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