--%>
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 : Explain growth accounting. Economic

    Economic growth is measured by the rate of increase in national output, GDP. The output depends on inputs -labour, capital technology etc. the theories of economic growth bring out how and to what extent each input or factor contributes to the g

    		•
  • 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 : Formula for Fiscal deficit Fiscal

    Fiscal deficit: Fiscal deficit is stated as the surplus of total expenditure over total receipts, apart from borrowings. Fiscal deficit = Total expenditure (Rev. Exp. + Cap. Exp.) – Total Receipts

  • Q : Define revenue receipts Define revenue

    Define revenue receipts. Write the groups in which they are categorized. Answer: Any receipts that do not either make a liability or lead to reduction in assets is

    		•
  • Q : Zero primary deficits What points out

    What points out zero primary deficits? Answer: Zero primary deficits signify that the government has to resort to borrowings simply to make interest payments.

    		•
  • Q : Why government taken as capital receipt

    Why the borrowings by Government are taken as capital receipts?

    		•
  • Q : Microeconomics concepts as a primary

    Write a 3 page paper using microeconomics concepts as a primary mode of analysis.  Your paper should use 1.5 line spacing, a 12 point font, and 1inch margins.  Proof read your paper.  You will lose 5 percentage points per day for each day past the

    		•
  • Q : Consumption curve Illustrate a point on

    Illustrate a point on consumption curve at which APC = 1. Answer: APC = C/Y = 1 is possible when C = Y, that is, Consumption is

    		•
  • Q : Problem on full employment Does full

    Does full employment take place if AD = AS or S = I?

    		•
  • Q : Employment Effect Fiscal policy

    Fiscal policy measures used for achieving full-employment level of output and price include increase in the government expenditure and cut in tax rates. A cut in tax rates eliminates only the adverse effect of high tax rates, whereas an increase in government expendit

    		•