Explain and illustrate the relationship between bonds and interest rates. What effects do we expect it...

Explain and illustrate the relationship between bonds and interest rates. What effects do we expect it to have on the market?

Expert Solution

Bond and interest rates are inversely related. Means if an increase in interest rate will result in decline in the bond price and vice versa.

Bond:- Bonds are a debt based investment where an individual can purchase from government or corporation at a giver market rate.

If an individual got issued a bond with a higher interest rate on current market rate, the price of that bond will go down as demand for that bond decreases. If bond issued with a lower interest rate on current market rate, the price of that bond will increase.

A rise in the value of bond will effect market positively that all are willing to buy bonds. But a decline in the value of bond will effect market negatively that all are ready to pay less for it.

Here we can see that when interest rate was poin B, the Bond price was X. But later when decline in interest rate (point A) has increased bond price to point ( Y)

Rahul Sunny answered 2 years ago

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