--%>
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 : Reduction in quantity When equilibrium

    When equilibrium moves from point a to point b in the figure shown below, the only market experiencing a reduction in quantity supplied is illustrated in: (1) Panel A. (2) Panel B. (3) Panel C. (4) Panel D.

    Q : Nations wealth Adam Smith disputed that

    Adam Smith disputed that a nation’s wealth is, not the gold it possesses, but instead its: (1) Total population. (2) Capability to offer goods for its people. (3) Domestic financial capital. (4) Foreign investments. (5) Military might.

  • Q : Custodian of nations foreign exchange

    Name the institution that acts as a custodian of nation’s foreign exchange reserves? Answer: The Central Bank is an institution that acts as custodian of natio

    		•
  • Q : Inflation movements and factors Use

    Use economic theory to explain the inflation movements and factors influencing it. Use relevant models to explain the impact of changes in fiscal and monetary policies in curtailing inflation.

    		•
  • Q : Value added technique for national

    What is the alternative name of value added technique of estimating national income? The alternative name of value added technique of estimating national income is production method.

    		•
  • Q : Threats of SWOT analysis Threats of

    Threats of SWOT analysis: • Possible threat from other banks and other financial institutions • There is always a possible threat of market fluctuations. By this we me

    		•
  • Q : Tariffs Tariffs: -are also called

    Tariffs: -are also called import quotas. -may be imposed either to raise revenue (revenue tariffs) or to shield domestic producers from foreign competition (protective tariffs). -are per unit subsidies designed to promote exports. -are excise taxes on goods exported abroad.

    		•
  • Q : What is Equilibrium What do you mean by

    What do you mean by the term Equilibrium? Also state its proper definition.

    		•
  • Q : IMF? In saying that the present system

    In saying that the present system of floating exchange rates is managed we mean that: IMF officials determine exchange rates on a day-to-day basis. countries that allow their exchange rate to move freely will lose their borrowing privileges with the IMF. the value of any IMF member's currency

    		•
  • Q : Problem on equivalent Consumer Surplus

    Tom reimburses $5.00 for a ticket to see a present hit movie. If Tom was willing to reimburse up to $7.00 for that ticket, his consumer surplus equals: (1) $5.00 (2) $2.00 (3) $7.00 (4) Tom does not receive any consumer surplus as he purchased the ticket.