Although we hear many opinions about interest rates and their trends and impacts, very few people seem to understand the meaning and importance/relevance of these rates in various areas of our lives. After many decades of involvement in political campaigns, leadership, leadership planning/training, real estate, financial sales and consulting, etc., I firmly believed that one benefits from understanding more about these and how they affect many things, in our lives! ! Whether it’s related to personal, organizational, and/or public finances/expenses, home ownership and related costs, credit-related issues, business matters, stock and bond listings, etc., interest rates, true! and significantly matter! With that in mind, this article will briefly attempt to consider, examine, review, and discuss 5 of these areas, and how the cost of money makes a significant difference.
1. Bond prices and interest rates: The price of a bond is generally inversely related to interest rates. When these rates go down, prices go up, and when they go up, the opposite happens! Bonds have what is known as a par value, which is the price paid at the end of the term. Markets generally peg them at 100, which is $1,000 per bond, at maturity. However, during the period, the price can go up or down, which affects the liquidity – related problems!
two. Mortgage rates: Over the past few years, we have witnessed and experienced record low mortgage interest rates, which have helped the housing/real estate market in general, especially in terms of price increases. In most areas of this country, we are seeing home prices at their highest ever, by a significant and dramatic amount! When this rate is low, a homebuyer can buy more for their money because their monthly payments are so low. Consider, though, what might be the potential ramifications and impacts when these rates inevitably rise?
3. Consumer credit: Low borrowing costs, helps the auto industry, in terms of consumer finance, etc.! Although, not as much as other vehicles, the rates on credit card debt are lower and there are often shorter-term promotions, offering deals! However, since most of these are variable and based on some index etc, what happens when there is an increase in this?
Four. Business debt: Another affected area is the commercial cost of loans! Today, they have had access to relatively cheap money, which helps reduce the costs of borrowing, general operations, buying inventory, etc. But what happens when this works?
5. Impacts on stock prices: For some time, because bonds have paid so little, in terms of dividends, etc., the stock market has been considered by many to be the only game in town. In addition, many corporations have seemed better off than they probably are, and we have seen higher price-to-earnings ratios than in the past. How long will this last? How high can you go?
Many factors impact these problems, especially: real and/or perceived inflation; consumer confidence; politics/government actions/the Federal Reserve, etc. The more you know and understand, hopefully the better prepared you will be!
