University of the People
BUS 2203 – Principles of Finance1
Discussion Assignment Unit 2
June 2021
What will happen to bond prices if terrorism ended and the world’s nations unilaterally disarmed and
adopted free trade policies? Why?
In order to fully understand the impact ending terrorism would Have on bond prices, we first need to
understand how terrorism currently affects world’s economies. According to CFA institute’s Journal
review (2016) Terrorism has a statistically and economically significant impact in countries where it
occurs, resulting in a higher cost of debt for the sovereigns and for the firms in those countries. The
effects are greater in developing than developed markets.”Terrorism can result in a higher cost of debt
for the governments of affected countries as well as for companies located in those countries. By
extension, such heightened risk may result in lower bond ratings for the sovereign” (Ross, 2016).
“There are numerous factors, both fundamental and technical, that impact bond prices. Fundamental
factors include overall economic activity and the ensuing inflationary pressures, unemployment, and
budget and trade deficits. Credit concerns with specific issuers may negatively affect the price of an
issuer’s securities as well. Technical factors influencing supply and demand of the bond market in
general as well as particular bonds can lead to significant price movements”(Strumeyer, 2005, p.49).
“The risks associated with terrorism will remain a salient issue for the foreseeable future. In addition
to the direct cost that it exerts through loss of life and damage to property and infrastructure, terrorism
imposes longer-term indirect costs in the form of reduced demand for goods and services, supply
chain interruptions, increased cost of doing business because of the need for insurance, and decreased
foreign direct investment as a result of capital flight” (Ross, 2016).
The end of terrorism and world governments unilaterally disarming trade policies, the world would
become a fair trading ground where previous factors that affected bond prices would no longer be in
play. Bond prices would stabilize.
Reference:
Strumeyer, Gary. Investing in Fixed Income Securities: Understanding the Bond Market. Hoboken,
NJ: John Wiley and Sons, 2005.
https://www.cfainstitute.org/en/research/cfa-digest/2016/04/terrorism-and-its-impact-on-the-cost-of-d
ebt-digest-summary