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 an instrument in which both sides are balanced by placing an inverse relationship upon each other so there would always be am increase in one factor for decrease in another factor.

Relationship between market price of the bond and market rate of interest is of an inverse relationship. This relationship is used to maintain the flow of money into the entire economy because when there is increase in the market rate of interest, then there would be a simultaneous decrease in the the price of the bond to control the money flow into the overall economy and when there would be a decrease in the market rate of interest, then there would be also simultaneous increase in the price of the bond because of lower Bond yields.

When time to maturity is concerned, then those bonds which are having a higher time in maturity, they will be having a greater risk when there would be a change in the interest rates, and those bonds which are having a lower time to maturity then there would be a lower risk due to change of the interest rates.

So, this will reflect an inverse relationship between the bond prices and the market rate of interest in respect of a teeter totter.