The Federal Funds and Target Rate (Essay Sample)
History dictates that interest rates will not stay low forever, but the speed at which rates rise and how far they climb is difficult to predict. Those who pay no attention to interest rates can miss out on valuable opportunities to profit in a rising rate environment. There are several ways that investors can cash in on rising rates, such as buying stocks of companies that consume raw materials, laddering their CD or bond portfolios, strengthening their positions in the dollar, and refinancing their homes.
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Stock market
The Federal Funds target rate fluctuates hourly and is one of the country’s most volatile rates. Changes in the Federal Funds target rate have a significant impact on other interest rates in the financial system and, consequently, on securities prices. Because coupon rates on newly issued bonds tend to reflect prevailing interest rates, previously purchased bonds generally are resold at a discount or premium, their prices moving inversely with the direction of interest rates.
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