--%>
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 : Backward shifting of incidence tax When

    When firms bear the legal incidence of a tax, this is backward shifted while: (1) firms burden consumers by raising their prices. (2) the tax burden is borne by workers in the form of lower wages. (3) resource suppliers seek higher factor payments to

    		•
  • Q : Relationship between interest rate and

    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?<

    		•
  • Q : Define bank rate policy Define bank

    Define bank rate policy? How does it operate as a technique of credit control? Answer: Bank rate is the rate at which the central bank provides loans to the commerc

    		•
  • Q : Explain Shut Down Price Explain the

    Explain the term Shut Down Price? Illustrate it.

    		•
  • Q : Main concerns of microeconomics Can

    Can someone explain/help me with best solution about problem of microeconomics in economic... Main concerns of microeconomics would consist of: (w) rates of inflation. (x) consumer options. (y) rates of unemploymen

    		•
  • Q : Maximum Consumer Surplus Assume that

    Assume that you receive $18 worth of ‘jollies’ (that is, utility, satisfaction or pleasure) from the very first hole of golf played on a particular day, and that your extra jollies from succeeding the holes drops $1 for each and every hole played. You shou

    		•
  • Q : Problem on slope of demand curve The

    The demand curve for DVD games is a straight line, therefore its slope: (1) Is constant, although price elasticity of demand drops/falls as output increases. (2) Price elasticity are both stable. (3) Is constant, although price elasticity of demand increases as the pr

    		•
  • Q : Microeconomic and macroeconomic effects

    Predictions which restricting international trade to protect specific industries and “infant” firms would (a) inefficiently decrease aggregate output and employment, (b) raise the market power of the protected firms and their workers, and

    		•
  • Q : Economic Economic systems differ

    Economic systems differ according to which two main characteristics?

    		•
  • Q : Paradox of Value-total utility and

    I have a problem in economics on Paradox of Value-total utility and marginal utility. Please help me in the following question. Water is more precious than diamonds when measured by _____, however less valuable when measured by _____. (i) Total cost, total benefit. (i

    		•