Asked by David
According to the formula,
Bond price= y/r
so bond price has a inverse relationship with interest rate.i.e. interest rate increases, bond price decreases.
But why does it contradict with this demand-supply anysis: r(interest rate increases)--> returns from buying bonds increase-->cost of holding money increases-->asset demand for money decrease-->supply of bonds decreases-->PRICE OF BONDS INCREASES
what's wrong with the demand-supply anysis, thx!
Bond price= y/r
so bond price has a inverse relationship with interest rate.i.e. interest rate increases, bond price decreases.
But why does it contradict with this demand-supply anysis: r(interest rate increases)--> returns from buying bonds increase-->cost of holding money increases-->asset demand for money decrease-->supply of bonds decreases-->PRICE OF BONDS INCREASES
what's wrong with the demand-supply anysis, thx!
Answers
Answered by
David
My logical deduction is: asset demand for money + transaction demand for money= money demand=supply of bond(as bond issuers create supply of bonds)
Answered by
economyst
Because bonds are typically sold with fixed denominations at a set interest rate; say $10,000 at 6%. If interest rates are 6% and the bond pays 6%, then the bond is being sold at par or $10,000. Now say the interest rates rise to 7%. You certainly wouldnt pay 10,000 for the bond. You buy at discount and pay something less.
There are no AI answers yet. The ability to request AI answers is coming soon!
Submit Your Answer
We prioritize human answers over AI answers.
If you are human, and you can answer this question, please submit your answer.