1. Bond prices vary inversely with market interest rates. Because the stream of promised payments usually is fixed no matter what subsequently happens to interest rates, higher rates reduce the present value of these promised payments, and thus the bond price.
2. The value of bonds falls when people come to expect higher inflation. The reason is that higher expected inflation raises market interest rates, and therefore reduces the present value of the fixed stream of promised payments.
3. The greater the uncertainty about
whether the promised payments will be made (the risk that the issuer
will default on the promised payments), the lower the expected payments
to bondholders and the lower the value of the bond.
4. Bonds whose payments are subjected to lower taxation provide investors with higher expected after-tax payments. Because investors are interested in after-tax income, such bonds sell for higher prices
The early advocates of federal deposit insurance argued
that it would provide safety and liquidity for small depositors, would
protect the smooth working of the national payments (check-clearing)
system, and most important, would protect against bank runs. Although the proponents of deposit insurance overstated the damage caused by bank runs, insurance did reduce runs and bank failures.
Opponents of deposit insurance argued, based in part on
the experience of the state funds, that insurance would weaken the
incentive for depositors to care whether their banks and S&Ls took
excessive risks. In the thirties, before deposit insurance, banks held
capital of almost 15 percent of assets. (Capital, which consists of
money put up by shareholders, is the "cushion" to absorb losses.) By the late seventies bank capital ratios had fallen to only 6 percent of assets and double liability had been abolished.
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