Why Malaysia market will crash when US bond downgraded?

What are the reasons behind cause the US bond downgraded? The US bond downgraded by the rating agency (S&P) was due the US politicians were increasingly unable to handle the country s huge fiscal deficit and debt load. The relationship between debt level and the financial risk are positive related but financial risk and rating are negative related. When the debt level rises, the financial risk will also increase (e.g. higher percentage that borrower unable to meet the obligation) thus a fall in rating level. US bond downgraded from AAA to AA+ was mainly due to the ability of US Government to repay the debt is low. When being downgraded, US Government has to increase interest rate to compensate for the investors for taking additional risk. In the past, US bonds are known as risk-free to the public (RFR). As risk free rate (RFR) increase, it will initially affect the bond market interest rate (Formula: interest rate = RFR + risk premium). As RFR increase, the interest rate increase. The company has to re-issue new bonds with higher interest rate in order to attract investors to purchase. The relationship between interest rate and bond price are inversely related. Old bonds will be less attractive compare to the new issue bonds result the value on old bonds fall. Formula for a bond price:

= dividend paid on last year multiple by the growth of the company K = the required rate of return by investors G = the growth of the company As known the components of K = RFR + Risk Premium When RFR increase, investors require higher rate of return to compensate for forgone the US bond. Forcing the value of K increase to a satisfy level, thus the denominator value of the formula increase which result a fall the bond price. Theoretically, AA+ bonds were still considered a low risk investment, but why investors don t willing to spend his or her money to invest in US bonds? Reason was investors are less confidence in US market. In the past, US Bonds has never been downgraded. It reflects that the US current economic condition was weak. As a proved, US had printing money to cover the losses incur during SEPT 2008 (Lehman Brother Incident) Malaysia mains source of income generated from economic are exporting and US is our biggest consumers. When US market fall, unemployment rate will increase thus affect the purchasing power of the consumers. When US citizens decline in purchasing power, US will import less goods from other countries thus result a fall in Malaysia economic.

In addition. later it will reflect a fall in economic. When there s a fall in share market. share market was the leading indicator of the economic which always move before the economic. .

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