--%>
Assignment Help - homework help

Relationship between interest rate and bond prices

What is the relationship among interest rate and bond prices? Is there any difference among T-Bills versus Corporate bonds in reaching your assessment? Whenever the stock market falls, where do you assume that most investor place their money and why?

E

Expert

Verified

As the interest rate increases, the bond prices decline. Suppose a bond (face value $1000) paying an annual interest of $100 was purchased when the interest rate is 10% as well. If it is to be sold currently where the interest rate is 12%, when current bonds would pay an interest rate of $120, its price need to be lowered so that it attracts investors. The price an investor may be willing to buy this bond which matures in a year can be determined as:

Price of bond = Amount to be paid in one year/(1+interest rate in the market)

Thus bond price and interest rates are inversely related (Gamber & Colander, 2006). Yes, there are differences between T-bills vs Corporate bonds. Corporate bonds are issued by corporations to raise capital for investing in their new projects and operations, whereas T-bills are issued by the Government to decrease money supply or any other reasons. It is possible for a company to go bankrupt and default on the bonds but it is much less probable for governments to default on bonds. Hence in my assessment, T-bills are much safer as compared to corporate bonds.

Whenever the stock market falls, it may be due to any reason such as a declining economy, recession, etc. In such a period, it is highly probable that companies make much lower profits than expected and some companies may even default in their obligations. Hence I suppose that most investors place their money on bonds, which are much safer than the stock market and especially the government bonds, because they are the safest and also just have lower interest rates, which can be easily paid off by the US government.

   Related Questions in Macroeconomics

  • Q : Speculators actions when they are right

    When speculators are right, their actions: (1) Cause already depressed prices to drop/fall further. (2) Raise the risks to another firm of doing business. (3) Prevent price refuses from their peaks. (4) Reduce both the phase of prices and their volatility across time.

    		•
  • Q : GDP gap "The economic cost of

    "The economic cost of unemployment is measured by the GDP gap." Explain this statement. ?

    		•
  • Q : Open-Economy Macroeconomics

    Open-Economy Macroeconomics   Suppose the structure of an economy with a flexible exchange rates is represented by:   C = 200 + 0.85*(Y - T)             &n

    		•
  • Q : Merger and acquisition of firms

    Question: Suppose firm 1 and firm 2 merge. Call the new firm A. It has output xA and profit πA. Suppose there is Cournot competition after the merger. For now, we assume that the marginal cost of Firm A, the mer

    		•
  • Q : Explain Product Market Equilibrium. To

    To begin with, let us recall our three-sector product-market equilibrium model given as C + I + G = C + S + TTo this three-sector model, we now add the foreign trade-the exports (X) and imports

    		•
  • Q : Explain the term Macroeconomics

    Macroeconomics is a study of: (1) the economy as an entire or in the aggregate. (2) worldwide economic problems of individual households. (3) interactions among firms and households in one exact market or industry. (4) the rising income inequality wit

    		•
  • Q : Cost of a foreign currency When cost of

    When cost of a foreign currency increases its supply too increases. Elucidate why?

    		•
  • Q : When price of demand curve modified

    Whenever the price of a good all along a demand curve is modified since of a change in supply, the substitution effect is the modification in purchases of a good which result from a change merely in: (1) The associative price of that good. (2) Consumer tastes and prio

    		•
  • Q : Difficulty of scarcity People in whole

    People in whole the world confront the difficulty of scarcity at always because: (i) restricted resources and times preclude producing all the goods people need. (ii) greedy capitalist monopolies charge excessively high prices. (iii) international mar

    		•
  • Q : Law of equal marginal advantage The law

    The law of equivalent marginal advantage is violated when people: (1) think about paying a higher price that ensures better quality. (2) elect a general as president while war clouds threaten. (3) fail to allocate similar resources within equally valu

    		•