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STOCK MARKET AND THE BOND MARKET.
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Compares and contrasts both markets in the U.S. from the investor perspective.... More...
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Paper Abstract:
Compares and contrasts both markets in the U.S. from the investor perspective. Advantages and disadvantages of each class of securities. Dow Jones Industrial Average as a measurement. Volatility of the markets, and risks for the investor. How the two investment vehicles differ. Three factors that determine price of a bond. Four Exhibits.

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COMPARING AND CONTRASTING THE STOCK MARKET AND THE BOND MARKET IN THE UNITED STATES This research compares and contrasts the stock market and the bond market in the United States from the perspective of the investor. The assessment discusses advantages and disadvantages of each class of securities. There are several barometers used to describe stock market activity in the United States. The most widely known of these barometers is the Dow Jones Industrial Average of 30 stocks. There are other Dow Jones index averages, utilities and transportation as examples, and there are other indexes, such as such as the Standard and Poors 500, the Wilshire 5000, the NASDAQ, and others. The Dow Jones Industrial Average is easily the most recognizable stock market measure to most people. W

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Exhibit 4 [pic] [Source: Bernstein, 2 1] References AIS Capital Management. Essentially, bonds are the long-term, public debt of an issuing entitymarketed in a convenient and affordable denomination. Three factors determine the price of a bond. Another important characteristic of bonds is the term-to-maturity, orthe life of debt instrument. J., Joehnk, M. The volatility of these markets createsrisk for the investor. While the datapresented in Exhibit 1 indicate that holding period has a major effect onreturn on investment, stocks outperform bonds in relation to the maximumreturn on investment regardless of the length of the holding period. The chart in Exhibit 3 compares the Standard and Poors 5 and the 3 -Year Corporate Bond index for the period 31 December 1979 - 12 November1989. (1995). Thedownside of this analysis is that the volatility of stocks is greater thanthat of bonds through holding periods up to and including 1 years. C. As thecoupon interest rate and term-to-maturity characteristics not subject tomanipulation, the price behavior of bonds relates closely to the changes inmarket interest rates. ||Maximum return |4 .4 |21.6 |15.6 |11.7 |1 .1 ||Minimum return |-9.2 |-2.1 |- .1 | .4 | .7 ||Treasury bills |. |. For both periods, but especially for the longer period, Bernstein(2 1) shows that a portfolio with approximately 2 percent of its totalvalue in bonds delivers superior returns on investment. AIS Capital management (1999)illustrates this argument in two charts. Bondmarket volatility compared to stock market volatility. The most widely known of these barometers is the DowJones Industrial Average of 3 stocks. These changesin the term-to-maturity characteristic of a bond are important because theprevailing maturity of the issue, among other factors, affects the pricevolatility of a debt obligation. The chart clearly indicates the tendency for stock prices and bondprices to move in opposite directions. Portfolio distribution. This approach attempts to capitalize onfindings that the highest maximum return on investment for either equitystocks or bonds occurs over the short to medium term. Overall, the choice between stocks and bonds for investors dependslargely on the investment goals of the individual investor. There are several barometers used to describe stock market activity inthe United States. Thus, while bond price volatility is in part a function of marketinterest rates, bond price behavior is also a function of coupon interestrates and term-to-maturity periods as functions affecting bond yield. D., & Pinches, G. Ibbotson Associates Year-Book 1995. Joint cross-section/time-series maximum likelihood estimation for the parameters of the Cox-Ingersoll-Ross bond pricing model. Wilton,Connecticut: AIS Capital Management. Retrieved fromthe Internet 2 1- 5-14 at: http://www. The charts are in Exhibits 2 and3 on the following page. (2 , February). (3rd ed.). | 1-yr | 5-yrs |1 -yrs |15-yrs |2 -yrs ||Large company stocks |. The character of the relationship tends to followan inverse pattern, e.g., as market interest rates move up, the price of abond moves down, and as market interest rates move down, the price of abond moves up. Bonds are consideredare fixed income securities because the debt service obligations of theissuer are fixed, in that the issuer agrees to pay a fixed amount ofperiodic interest to the bond holder and to repay a fixed amount ofprincipal at the date of maturity (Gitman, Joehnk, & Pinches, 1995). efficientfrontier.com/aa.shtml Daves, P. While the Dow JonesIndustrial Average is not as representative of the market generally as aresome other indexes, the pattern of movement in the Dow Jones IndustrialAverage has been found to correlate well with the pattern of movement ofother measures of stock market activity in the United States. Investors, thus, need to know how the twoclasses of investment vehicles differ from one another if they are toselect securities for portfolios that correlate well with their individualinvestment objectives. EF, 1-5. |. NewYork: Ibbotson Associates. Ibbotson Associates. |. |. Theassessment discusses advantages and disadvantages of each class ofsecurities. The short-term segment the public debt marketinvolves instruments with maturities of one year or less. Beyond 1 -yearholding periods, equity stocks issued by large companies outperform bondsin relation to both maximum return and minimum return. (1993, May). The Financial Review, 28(2), 2 3-237, Gitman, L. The online allocator. |. |. Thus, the promise yield of a bond,in effect, is the internal rate of return of the bond (Gitman, Joehnk, &Pinches, 1995). C. This relationship holdsfor both corporate bonds and government bonds. Twoapproaches to yield determination for bonds predominate-current yield andpromised yield. The choice ofsecurities for a portfolio also depends upon the comfort level of anindividual investor with the volatility and uncertainty of equity stocksover shorter terms. J., & Chan, K. |. This strategy holds that investors should holdequity stocks when stock market indexes are rising, while they should holdbonds when stock market indexes are falling. The outcomes areless definite for the shorter period because of high volatility. (1995). Exhibit 1, (on thefollowing page) illustrates this point. Generally, the shorter the term-to-maturity of a bond, the less is the price volatility of the instrument(Gitman, Joehnk, & Pinches, 1995). Over the long-term, equity stocks issued by large companies tend tooutperform both long-term and short-term bonds. There are other Dow Jones indexaverages, utilities and transportation as examples, and there are otherindexes, such as such as the Standard and Poors 5 , the Wilshire 5 , theNASDAQ, and others. |23.9 |2 .1 |18.2 |16.9 ||Minimum return |-43.3 |-12.5 |- .9 | .6 |3.1 ||Long Term T-bonds |. Managerialfinance. Exhibit 2 [pic] [Source: AIS Capital Management, 1995] Exhibit 3 [pic] [Source: AIS Capital Management, 1995] The chart presented in Exhibit 3 illustrates the AIS CapitalManagement strategy of shifting into and out of stocks and bonds asconditions change in the market. A bond's current yield is the amount of current incomethat a bond provides (annual interest) relative to its prevailing marketprice. K., Wright, D. The definition of large-companystocks in this particular analysis includes the equity stocks of publiclytraded companies comprising the Standard and Poors 5 . comparing and contrasting the stock market and the bond market in the united states This research compares and contrasts the stock market and the bondmarket in the United States from the perspective of the investor. The promised yield is afunction of the present value concept. The Dow Jones Industrial Average is easily the mostrecognizable stock market measure to most people. The chart inExhibit 4 (on the following page) shows return on investment based on theproportion of bonds in the portfolio for two periods of analysis - 197 -1996 and 199 -1996. R., & Ernhardt, M. Yield at any given date, thus,tends to be the principal measure used to compare bonds with diverse couponinterest rates and yield-to-maturity periods (Daves & Ernhardt, 1993). The term-to-maturity characteristic of bonds constantly change,however, as an instrument moves closer to its maturity date. |. Bernstein, W. The long-term segment is the bonds market where thematurities of the debt instruments are in excess of seven-to-ten years(Gitman, Joehnk, & Pinches, 1995). (2 1). New York: Harper & Row. These factors are (1)the coupon interest rate that the issue carries, (2) the length of thebond's term-to-maturity, and (3) current market interest rates. J. (1995). ||Maximum return |54. Further, the stock market and the bond marketfrequently respond different to financial, economic, and political stimuli(Reilly, Wright, & Chan, 2 ). This situation tends to make the price of a bond dependentupon the instrument's prevailing yield. Thus,through holding periods up to 1 years, in relation to minimum return oninvestment, bonds outperform large-company equity stocks. Reilly, F. Both stock prices and bond prices in the securities markets in theUnited States tend to be volatile. |. ||Maximum return |14.7 |11.1 | 9.2 |8.3 |7.7 ||Minimum return | | .1 | .1 | .2 | .4 | [Source: Ibbotson Associates, 1995] AIS Capital Management (1999) contends that the best return oninvestment derives from a strategy of shifting investment securities asmarket-conditions change. E. Journal of PortfolioManagement, 27(1), 82-94. Promised yield, by contrast, includes both interest income, priceappreciation or depreciation, and total cash flow received over the life ofthe instrument in the bond valuation process. Bernstein (2 1) argues that the best investment strategy is toinclude both equity stocks and bonds in one's portfolio. |. Exhibit 1|Annualized Return in % vs Holding Period ||. |. |. The intermediatesegment involves issues with maturities in excess of one year but less thanseven-to-ten years.

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