An Explanation of Bonds and How They Relate to the Economy?

Hope no one acts like a total dick but I never understood the concept of why the Federal reserve are buying bonds to "help" the economy. I'm reading the wall street and I'm confused how it works.

 

Can someone here explain bonds and stuff. I feel a little lost and I'm worried because I'm going into finance and i feel ignorant.

 

 

Much appreciated

Hope no one acts like a total dick but I never understood the concept of why the Federal reserve are buying bonds to "help" the economy. I'm reading the wall street and I'm confused how it works.

 

Can someone here explain bonds and stuff. I feel a little lost and I'm worried because I'm going into finance and i feel ignorant.

 

 

Much appreciated

 

Federal reserve buying them helps the economy because they're pretty much the safest investment you can make, and they're only taxed at the Federal level. They're not going to make you a ton of money, but it's a really secure bond to own

It also acts as a way to artificially lower the long term interest rate, which while being for the average person, is good for the banks. When the long term interest rate is low, it promotes a lot more activity in the markets since you're able to borrow without taking on much cost in the end. They also work as a small scale bail outs to the Banks because with a lower LTIR they're able to pay back their debts easier.

So the Federal Reserve actually buys bonds from the banks? So, pumping money into the banks so they can charge lower interest rates?

 

Excuse me if I don't understand. I knew you would reply because you're into economics, that's why I asked here. Some times it's hard to have a good discussion with a professor when they have short office hours and the courses are too limited.

So the Federal Reserve actually buys bonds from the banks? So, pumping money into the banks so they can charge lower interest rates?

 

Excuse me if I don't understand. I knew you would reply because you're into economics, that's why I asked here. Some times it's hard to have a good discussion with a professor when they have short office hours and the courses are too limited.

It's called an Open Market Operation. The Fed buys these Bonds to manipulate the money supply. When they feel like increasing the money supply would be beneficial to the economy, they begin buying these bonds from the Banks, which increases the monetary base. When the monetary base is increased, the bank has extra cash in their reserves, so they don't need to borrow as much money which then lowers the interest rate.

 

If they wanted to raise the interest rate they would start selling the bonds, which would decrease the banks money, which would cause the banks to offer a higher interest rate so people would have more incentive to hold their money in a bank

It's called an Open Market Operation. The Fed buys these Bonds to manipulate the money supply. When they feel like increasing the money supply would be beneficial to the economy, they begin buying these bonds from the Banks, which increases the monetary base. When the monetary base is increased, the bank has extra cash in their reserves, so they don't need to borrow as much money which then lowers the interest rate.

 

If they wanted to raise the interest rate they would start selling the bonds, which would decrease the banks money, which would cause the banks to offer a higher interest rate so people would have more incentive to hold their money in a bank

 

1)"they" as in the banks, or the Federal reserve? If it is the Federal reserve, they are selling it to the banks or to someone else? I can see how it would effect the increase in interest rate if they were selling directly to the banks, but if they can sell to someone else, that still effects the bank and it's interest rates?

 

2) So, since they are buying bonds and decreasing the interest rate, that gives incentive to the people to NOT hold their money into the bank AND go out and spend?

Yea the fed and yes only when theyre dealing with the banks

 

Lower interest rate means less incentive to put your money in the bank because it won't experience growth

Yea the fed and yes only when theyre dealing with the banks

 

Lower interest rate means less incentive to put your money in the bank because it won't experience growth

 

 

 

Sorry for asking these questions. Who else can the Federal Reserve sell bonds to? Would they ever want to sell other than the banks other than gaining that money for themselves?

 

Sorry for asking these questions. Who else can the Federal Reserve sell bonds to? Would they ever want to sell other than the banks other than gaining that money for themselves?

 

The federal reserve is a bank, it's just the main bank. They aren't about making money, they're about instituting financial policy, so they really inly deal with banks

Alright thanks :repped:

Alright thanks :repped:

 

And if you were asking if regular people can buy bonds, no they can't. If you want to buy bonds you need to do it through a financial advisor

And if you were asking if regular people can buy bonds, no they can't. If you want to buy bonds you need to do it through a financial advisor

 

 

Oh well yeah, that I actually knew haha.

 

Also with stocks, if I want to buy stocks (not going to buy right now obviously), what can I look into for advice/help/ and how to do it?

 

Oh well yeah, that I actually knew haha.

 

Also with stocks, if I want to buy stocks (not going to buy right now obviously), what can I look into for advice/help/ and how to do it?

 

I would just read different financial sites advice, but the thing is once news get reported on a company, their stock will already reflect that news before the general public gets to invest. It's hard to make any type of money if you're trading with not that much in the first place because the fees per transactions kill any potential gains you would get

I would just read different financial sites advice, but the thing is once news get reported on a company, their stock will already reflect that news before the general public gets to invest. It's hard to make any type of money if you're trading with not that much in the first place because the fees per transactions kill any potential gains you would get

 

Good point. Currently I've been reading the Wall Street. Some stuff are pretty hard to understand though.

 

Usually it's the technology section of the finance part that makes the most sense.

 

Bonds/economics/stocks are what gets me.

Alright thanks :repped:

 

Ditto that.