--%>
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 : 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 : Demand curves when longer periods are

    Whenever longer periods are considered and hence bigger ranges of adjustments (that is, substitutions) become probable, demand curves tend to become: (i) Flatter, and therefore do supply curves. (ii) Flatter, as supply curves become steeper. (iii) Ste

    		•
  • Q : About macroeconomics Do you think that

    Do you think that macroeconomic policy should be designed to achieve a measured unemployment rate of zero? Why or why not should this be the case?

    		•
  • Q : Meaning of Fiscal policy Meaning of

    Meaning of Fiscal policy:Fiscal policy is the set of decisions and principles of a government regarding the extent of public expenses and mode of financing them. It is about the attempt of g

    		•
  • Q : Illustration of equal marginal advantage

    Can someone please help me in finding out the accurate answer from the following question. Shoppers who shift among checkout lanes until it emerges that all register lines are probable to be equally time-consuming are trying to verify to the law of: (i) Equivalent mar

    		•
  • Q : One party to a transaction deceives

    If one party to a transaction deceives another party prior to a deal be reached, this is termed as: (i) Bad luck. (ii) Adverse selection. (iii) Moral hazard. (iv) Polyandry. (v) Rational ignorance. Please someone suggest me the rig

    		•
  • Q : Changing value of multiplier ‘Over the

    ‘Over the precedent 30 years, and particularly as our entry into the EU, imports (and exports) as a proportion of GDP have increases considerably in the UK. What influence has this had on the value of multiplier in the UK?’

    		•
  • Q : Macroec Examples of command economies

    Examples of command economies are: a) the United States and Japan b) Sweden and Norway c) Mexico and Brazil d) Cuba and North Korea

    		•
  • Q : Utilization of Bond market to make and

    How does the FED utilize the bond market to make and destroy money? Which technique do developed countries utilize to decrease the chance of experiencing inflation? What about the Banana Republicans and inflation, do they have this means acessible to

    		•
  • Q : Economics I help with part 2 and the 4

    I help with part 2 and the 4 part question.

    		•