Question

1. Using a teeter-totter as the basis for your analysis, explain the relationship between the market price of a bond and the market rate of interest. Include time to maturity in your explanation

Answer 1

Teeter tooter is absolutely reflecting the relationship between the bond prices and the market rate of interest because they have a inverse relationship and in this toy also there are two ends which are to be properly Balanced by the weights of two individual.

So it is needed to balance the market price of the bonds and the market rate of interest because when the market rate of interest will be increasing, it will mean that the over on Bond prices will be decreasing because in market rate of interest will be having an inverse rate of relationship between the market prices of the bonds.

Federal Reserve will be trying to to increase and decrease the market rate of interest according to the monetary policy and when it will increase the market rate of interest then the bond prices will be going down and when it will be decreasing the market rate of interest then the bond prices will be going up so it is completely like this toy, in which both the ends are to be properly managed as they have the inverse relationships.