Although we hear many opinions on interest rates and their trends and impacts, very few people seem to understand the meaning and importance/relevance of these rates in several areas of our lives! After many decades of involvement in political campaigns, leadership, leadership training/planning, real estate, financial sales and consulting, etc., I firmly believed that one would benefit from understanding more about these things and how they affect many things in our lives! Whether it’s personal, organizational and/or public finances/spending,
home ownership and related costs, credit matters, business matters, stock and bond valuations, etc., interest rates really, really matter! With that in mind, this article will attempt to briefly consider, explore, 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 proportional to interest rates! When these rates fall, prices rise, and when they rise, the opposite happens! Bonds are known to have a face value, which is the price paid at the end of the term. Markets typically set them at 100, which is $1,000 per bond at maturity. However, the price may rise or fall during this period, impacting liquidity related issues!
2. Mortgage Rates: We have seen and experienced record low mortgage rates in recent years which has helped the overall housing and real estate market, especially in terms of price increases! In most areas of this country, we are seeing home prices at their highest levels ever, in significant, dramatic amounts! When this rate is low, the home buyer is able to buy more – home – for – their – buck because their monthly payments are so low! But consider what the potential ramifications and impacts could be when these rates inevitably rise?
3. Consumer credit: Low cost of loans, help to the automotive industry in terms of consumer financing, etc.! Although, not as much as other vehicles, credit card debt rates are lower and there are often shorter-term promotions, offers! However, since most of them are variable and based on some index etc., what happens when there is an increase?
4. Business Loans: Another affected area is business borrowing costs! They currently have access to relatively cheap money to help reduce borrowing costs, general operations, inventory purchases, etc. But what happens when this happens?
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5. Effects on stock market prices: For a while, because bonds paid so little in terms of dividends, etc., many saw the stock market as the only game in town! Additionally, many corporations appeared to be doing better than they probably are, and we were seeing higher price-to-earnings ratios than in the past! How long will it take? How high can it go?
Many factors influence these problems, in particular: real and/or perceived inflation; consumer confidence; politics/ government actions/ Federal Reserve etc. The more you know and understand the better – you’ll be ready!