Response on ACT5
The basic principle of bond investment is that the price of a bond is inversely related to the interest rates. For example, an investor who buys a 10-year bond with a par value of $1,000 and a coupon rate of 3% will receive an annual interest payment of $30. If market interest rates rise to 4%, and the investor buys freshly issued bonds of $1,000, he or she will get $40 per annual interest payment giving a better market value than the previous bond of $30. On the contrary, a 10-year bond with a par value of $1,000 and a coupon rate paying 2%, paying an annual interest of $20, the bond becomes more attractive, allowing the investor to sell it at a premium to realize a capital gain. The above exemplifies that when interest rates rise, bond prices decline, and when interest rates decrease, bond prices go up, thus, confirming the inverse relationship between interest rates and bond prices. An explanatory sequential mixed methods design will be ideal for answering the research question on the inverse relation between bond prices and interest rates. The quantitative aspect of the mixed methodology applies statistical and trend analysis to determine the inverse relationships between interest rates and bond prices. Building on the findings of quantitative analysis with qualitative research helps explore investors’ behavior or attitudes, which influence their investment decisions regarding the early redemption of their bonds (Creswell & Creswell, 2023).
Based on the quantitative nature of my research problem and objectives, a quantitative correlational research design will be adopted to address my research problem. This research design will help me predict the effects of 2022 SEC’s amendments to the CEO pay disclosure and firm performance on equity market, which is the intent of the study. Besides, it will enable me to tackle my research issue by testing the underlying theories deductively by examining the relationship between dependent and independent variables (Creswell & Creswell, 2023).
References
Chen, J. (n.d.). Callable (or redeemable) bond types, example, Pros & Cons. Investopedia. https://www.investopedia.com/terms/c/callablebond.asp#:~:text=If%20they%20expect%20market%20interest,company%20may%20recall%20the%20note.
Creswell, J. W., & Creswell, J. D. (2023). Research Design (6th ed.). SAGE Publications, Inc.
Schwab.com. (2023, March 7). What happens to bonds when interest rates rise? Schwab Brokerage.
https://www.schwab.com/learn/story/what-happens-to-bonds-when-interest-rates-rise#:~:text=When%20rates%20go%20up%2C%20bond,to%20changes%20in%20interest%20rates
Links to an external site.
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Response two ACT 5
Part One – Research Design
My research will address the business problem of inadequate training provided to healthcare professionals as they learn how to use a new electronic health record (EHR). I have spent time considering my research design and I believe that a mixed-methods design is most appropriate. Given the complexity of the issue and the diversity of the experiences among the healthcare workers who will be my research subjects, it seems that this approach will allow me to gather comprehensive data.
The mixed methods approach allows researchers to collect and analyze both quantitative and qualitative data within a single study (Ivankova & Creswell, 2009). Importantly, the term “mixed” implies that the differing types of data will be integrated at some point through the research (Ivankova & Creswell, 2009). I believe that I will be able to collect numerical data which will allow me to quantify the effectiveness of training programs while also collecting textual data which can help discover further insights that I could not account for in a survey. I plan on collecting data from a wide range of healthcare workers with different experiences regarding EHR training and use. Here is how I believe this design will support my topic:
Quantitative Component
Surveys and Questionnaires – I will design surveys and questionnaires to collect quantitative data, allowing me to measure and quantify aspects of EHR training and its impact. This approach is suitable for gathering structured data about the efficiency and effectiveness of training programs.
Statistical Analysis – Through quantitative analysis, I can quantify the extent of issues related to EHR training, such as the time spent on training, perceived adequacy of training, and its impact on healthcare workers’ efficiency and productivity. This data is essential for understanding the scale of the problem.
Qualitative Component
In-Depth Interviews and (possibly) Focus Groups – Qualitative data collection methods, such as interviews, will enable me to explore the experiences, perspectives, and perceptions of healthcare workers regarding EHR training. Depending on how my methods develop, I may also hold small focus groups which would allow participants to share their experiences and frustrations with training. Ideally, a focus group could also help to sythnesize an atmosphere which would solicit rich qualitative data concerning suggestions and recommendations to develop more effective training. These methods are well-suited for uncovering the nuances of their experiences, including challenges, frustrations, and potential solutions.
Thematic Analysis
My qualitative data will be subjected to thematic analysis, allowing me to identify recurring themes, patterns, and insights from healthcare workers. This component will help me gain a deeper understanding of the factors contributing to inadequate training and the potential strategies for improvement.
Integration and Triangulation
Mertens and Hesse‐Biber (2012) explain that triangulation is a process used by land surveyors, in which two known points are used to develop information about a third unknown point. In research, the concept is similar. I plan to use my qualitative and quantitative data as fixed points in an attempt to develop additional insights that would otherwise be unclear. Mertens and Hesse‐Biber (2012) highlight that triangulation can also be used a method of providing internal validity to research.
Flexibility and Richness
A mixed-methods design provides the flexibility to adapt the research process based on the specific needs and responses of my participants. I believe that this flexibility will be crucial in studying a complex issue like EHR training, where unexpected insights may emerge as I gather data.
Part Two – Bonds and Market Conditions
An investor may choose to redeem a bond early for a number of reasons. Of course, one possible reason would be risk. If an investor holds a corporate bond and is not happy with the direction of the company, they may choose to cut their losses and redeem the bond before it becomes even less valuable. If the bond is issued by a foreign government, then the investor has taken on what Hilscher and Nosbusch (2010) detail as sovereign risk. It is possible that the investment was made with missing information, since there is no international bond regulating authority (Hilscher & Nosbusch, 2010). However, a significant reason that an investor may choose to redeem a bond early, or sell it on the open market, is because of rising interest rates.
The Inverse Relationship Between Interest Rates and Bond Prices
Since the going market interest rate represents a rate which an investor can obtain, a rising market interest rate makes bonds seem less favorable to investors (Brigham & Ehrhardt, 2016). For example, if an investor had a choice of holding a bond with a coupon rate of 2.5% or investing in a different asset with an interest rate of 2%, the investor would wisely keep their capital invested in the bond. However, as the interest rate of the second asset rises, it becomes more attractive to the investor to point where if that asset had an interest rate of 2.5%, the investor could expect equal return from both investments. If the interest rate of the second asset surpasses the bond’s coupon rate (raised to 2.75% for example), then that asset may be more attractive than the bond. Of course, the investor’s choice may be influenced by other factors such as perceived risk. Regardless, there is a point at which the interest rate of the second asset will have risen high enough that the investor would rather put their capital into that asset.
This means that the bond is now less valuable than the second asset. In effect, this lowers the value which the investor places on the bond. Another way of thinking about this is that, in the present time (now), investors place a lower value on the cash flows that the bond will bring in the future. This is the concept of present value. As the market rate of other assets rise, the present value of bonds decreases. A bond with a lower present value will be sold for a lower price on the open market. Therefore, as interest rates increase, the value of bonds decrease. This inverse relationship works the other way as well. If interest rates decrease, the present value of bonds goes up so they become more valuable in the open market.
A Concrete Illustration
Consider a situation where an individual can invest in a corporate bond with a par value of $1000 and a coupon rate of 5%. They could also choose to invest in Treasury bonds with an interest of 3%. The Treasury bonds represent a reliable return with very little risk. Even after accounting for risk, this investor would rather put their money towards a corporate bond with a higher rate. The investor must spend $1000 to purchase the corporate bond, so let’s calculate why the investor believes that they can make more than $1000 in return. We will calculate the present value of the corporate bond, that is to say the value that the investor assigns to the cash flows that the bond will bring in the future. Brigham and Ehrhardt (2016) explain that the value of a bond can be calculated by adding the present values of each coupon payment that the bond will produce. The present value of each coupon payment can be calculated as:
��=���(1+��)�
where:
INT = dollars of interest paid each year (par value * coupon rate = 1000 * 5% = 50)
rd = the going rate (the market rate, i.e. the 3% rate of Treasury bonds)
t = number of years until the cash flow is generated (t=1 for the first payment, t=2 for the second, and so on)
Since this bond will provide an annual coupon payment (interest payment based on the coupon rate) and then a single lump sum payment of the par value at maturity, a full equation which takes the lump sum into account is as follows (Brigham & Ehrhardt, 2016):
��=∑�=1����(1+��)�+�(1+��)�
where:
Vb = present value of the bond
N = number of years to maturity
t = number of years until the cash flow is generated
INT = dollars of interest paid each year (par value * coupon rate = 1000 * 5% = 50)
rd = the going rate (the market rate, i.e. the 3% rate of Treasury bonds)
M = par value or maturity value of the bond
The following table calculates the present value of all 10 interest payments and the present value of the par value paid at maturity:
Year |
Coupon Payment |
PV of Coupon Payment |
1 |
$50 |
���(1+��)�=50(1+0.03)1=48.54 |
2 |
$50 |
���(1+��)�=50(1+0.03)2=47.13 |
3 |
$50 |
���(1+��)�=50(1+0.03)3=45.76 |
4 |
$50 |
���(1+��)�=50(1+0.03)4=44.42 |
5 |
$50 |
���(1+��)�=50(1+0.03)5=43.13 |
6 |
$50 |
���(1+��)�=50(1+0.03)6=41.87 |
7 |
$50 |
���(1+��)�=50(1+0.03)7=40.65 |
8 |
$50 |
���(1+��)�=50(1+0.03)8=39.47 |
9 |
$50 |
���(1+��)�=50(1+0.03)9=38.32 |
10 |
$50 |
���(1+��)�=50(1+0.03)10=37.20 |
N=10 |
M=1000 |
�(1+��)�=1000(1+0.03)10=774.09 |
Then, the value of the bond can be calculated by adding the present value of all coupon payments to the present value of the par value:
��=���������������������+������������=1170.60
You can see that the investor can reasonably assign a value of $1170.60 to this bond, considering that the alternative would be a reliable 3% return from Treasury bonds. Since this represents a positive return on their investment, the bond is very attractive. It’s almost as if the investor could say “Considering current market conditions, I can buy a $1000 corporate bond that is worth $1170.60”.
But, if the Treasury department announced that bond interest rates were being raised to 4%, that would change the present value of the investor’s corporate bond. Following the same formula and process, we would determine that the corporate bond’s present value would be $1,1081.11 when Treasury bonds were at 4%. Continuing the example, the present value of the corporate bond would be exactly $1000 if Treasury bonds were at an interest rate of 5%.
Finally, if the interest rate of the Treasury bonds rose to 6%, the equations above would determine that the present value of the corporate bond would now be lowered to $926.40. In this way, we can see that as interest rates go up, the present value of bonds goes down. Again, since a lower present value makes a bond a less attractive investment vehicle, their price declines on the open market. Investors would not be willing to buy a corporate bond whose present value is below the purchase price.
References
Brigham, E. F., & Ehrhardt, M. C. (2016).
Financial Management: Theory & practice (15th ed.). Cengage Learning.
Hilscher, J., & Nosbusch, Y. (2010). Determinants of sovereign risk: macroeconomic fundamentals and the pricing of sovereign debt*.
European Finance Review,
14(2), 235–262. https://doi.org/10.1093/rof/rfq005
Ivankova, N. V., & Creswell, J. W. (2009). Mixed Methods. In J. Heigham & R. A. Croker (Eds.),
Qualitative research in applied Linguistics (p. 137). Palgrave Macmillan. https://doi.org/10.1057/9780230239517
Mertens, D. M., & Hesse‐Biber, S. (2012). Triangulation and mixed methods research.
Journal of Mixed Methods Research,
6(2), 75–79. https://doi.org/10.1177/1558689812437100
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