EFFECT OF ECONOMIC GROWTH ON BONDS PRICES

Abstract

Purpose: The purpose of this study was to establish the effect of economic growth on bond price.Methodology: The research used an explanatory research design. 65 bonds listed in 23 categories at the NSE. The study used secondary data collected from NSE and the (KNBS) Kenya National Bureau of Statistics. A sample of 10 bonds was selected as these bonds were issued in the January 2008 and were still not mature by the 31st December 2012. Standard deviations were calculated for all the variables in the study.  Further statistical analysis was carried out by use of correlation and regression analysis where bond prices were regressed against inflation, exchange rates and economic growth measured using the Kenya’s Gross Domestic Product growth.  The Statistical Package for Social Sciences (SPSS) version 17 was used to conduct the analysis. The findings were presented in form of tables and figures.Results: Results on correlation revealed that there was a positive and insignificant relationship between GDP and the bond price and this was confirmed by the regression results which indicated that the inverse of GDP is positively related to bond prices.Unique contribution to theory, practice and policy: The study recommends that investors who are looking to invest into bonds should consider government policies as this determines the bond prices.  It is recommended that economic growth should be enhanced through the pursuit of expansionary monetary and fiscal policies. The use of expansionary monetary policy would be to reduce the interest rates and this would increase the access to finance. These would ensure that more factors of production are put into productive use and thus increasing the national income. Expansionary fiscal policies should include an increase in government spending.