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EFFECT OF MONETARY POLICY ON FIXED-INCOME SECURITIES
Learn even more about this topic with the Encyclopedia of Personal Finance™

Since monetary policy helps to determine interest rates, it also affects the values of fixed-income securities. The rates of bonds and other fixed-income securities are inversely related to the money supply. This means that if the money supply increases, bond rates decrease, and vice versa. When bond rates decline, the values of bond prices on the secondary market increase.

If the Federal Reserve is preparing to lower interest rates, bonds with the current higher interest rate will become more valuable. In this way, the Federal Reserve has a very significant impact on fixed-income securities through its monetary policy.

As a bond investor, it is very important for you to know what the Federal Reserve's current policy is, and whether it has a bias toward changing interest rates in the future -- one of the reasons investors hang on every word the Fed chairman says.

There is a direct link between monetary policy and fixed-income securities. But how does monetary policy affect the stock market?




LEARN EVEN MORE WITH THE ENCYCLOPEDIA OF PERSONAL FINANCE. CLICK HERE!

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