The Wall Street Journal (May 29, 2013) reported that on a particularly strong day in the stock market, the prices of long-term bonds issued by companies such as Apple, Merck, Microsoft, and McDonald’s all dropped significantly. “High-rated, low-yielding debt of household name companies has attracted strong interest because of the low perceived risk that these companies will fail to make good on their obligations,” the article stated. However, despite the safety of the investments, in late May, 2013, many investors sold off their debt holdings. As the demand for equity investments increased and therefore the attractiveness of debt offerings softened, the market prices for those bonds dropped.

REQUIRED:

a. What would prompt investors to sell debt (bonds) and purchase equity (stock)?

b. What are the differences in risk when investing in debt or equity?

c. Why would the price of a bond drop when investors move to sell their positions?

d. What happens to the yield on a bond investment when the market price drops?