Liquidity and volatility 2 and instruments in turbulent seas

Interest rate, bonds and other financial instruments

Last month we talked about the kinship of liquidity and volatility. As a backdrop to the story we rode on the examples given by winds and oceans. As their movement by winds or tides, which can become storms and storm surges; they are much like the price fluctuations in the markets when economic times are tough.

On the other hand, the world's seas are plied by various vessels that are usually designed for certain tasks; then their ability to operate under certain conditions is defined. So depending on their design, their size, their weight and also the skill of their crew; the ships have defined utility and come out better or worse spared from the vagaries of the sea and the storm. 

In our financial seas, these vessels are the companies or more specifically the financial instruments that float in the markets. Cash, for example, is the most boring of all investment alternatives. It is like sailing in the bathtub; unless you decide to sit on your cash for many years and where inflation and devaluation can severely gnaw away at your cash's purchasing power.

Read more about financial instruments | Interest rate

Always assuming your credit quality is good; debt instruments have sensitivity to interest rate turbulence to the extent of the term of the instruments. Sounds very technical and I explain better below.