A1) An interesting and very important financial news in the last month has been of the Fed raising interest rates for the first time in nine years. This has meant that the short term rates have risen from near zero percent. This decision by Fed is a positive signal about the strength of the economy (Lee, 16 Dec 2015).
A2) The article titled ‘Biology of Risk’ by John Coates talks about how the body reacts to distress and uncertainty, making us more vigil. But as the uncertainty becomes less or the body becomes accustomed to the risk, the response becomes less vigil and complacency kicks in. The article then applies this theory to the policy decision by Fed and how the recent practice of forward guidance may have made traders and investors complacent about the decision to be taken by Fed. This in turn might have made them take more risks and fuel another price bubble in real sector.
In my opinion the article provides a very interesting disadvantage of the forward guidance practice of Fed. So far almost all of the attention has gone towards how the practice is a game changer and how this forward guidance helps the market to understand the positioning of Fed. This counter argument compels us to think whether risk taking is fuelled by forward guidance by Fed and makes investors complacent about macroeconomic conditions in the future.
A3) Bonds are normally referred to as fixed income securities. They are called fixed income as bonds provide a regular, stable and consistent income stream throughout their life. This income is in the form of interest or coupon. The market price of bonds is not fixed and varies according to the market yield prevalent at different points in time. When the coupon rate of the bond is more than the market yield, the market price of the bond is more than the face value, while it is lower than face value when the market yield is more than the coupon rate (Investopedia).
A4) Variable Income is when the income depends on the amount of product or goods sold. The income is uncertain and changes from one period to another. On the other hand, a fixed income is when the amount of income is constant over time (Dictionary of Small Business).
Reference List
Lee, T. B., 16 Dec 2015. The Fed is hiking rates for the first time since 2006. That's a big deal. Vox Business & Finance. [online] Available at <http://www.vox.com/2015/12/16/10307910/fed-hikes-rates-for-the-first-time-in-9-years> [Accessed 04 January 2016].
Investopedia. Fixed-Income Security. [online] Available at <http://www.investopedia.com/terms/f/fixed-incomesecurity.asp> [Accessed 04 January 2016].
Dictionary of Small Business. Variable Income. [online] Available at <http://www.small-business-dictionary.org/default.asp?term=VARIABLE+INCOME> [Accessed 04 January 2016].
