Discuss, with examples, how the market interest rates affect the value of bonds.

Expert Solution

Relationship between Bond Value and Market Interest Rates (YTM)

YTM and Bond Value has inverse relationship.

If YTM increases, the price or value of bond decreases. Similarly, if YTM decreases, the price or bond value increases....other things remaining constant.

It can be understood by the following example,

Let the yield be 10 %, of a bond of par value of 1000, maturing in 5 years providing a coupon rate of 12%.

The value of bond today B is given by

Let the yield be 15 %, of a bond of par value of 1000, maturing in 5 years providing a coupon rate of 12%.

It can be observed from the above example, that with the increase in Yield Rate from 10% to 15%, the bond price has decreased from 1,075.80 to 899.46.

jeff jeffy answered 11 months ago

When the Fed changes the interest rates how does it affect the bond market and the...

When the Fed changes the interest rates how does it affect the bond market and the stock market? Do you expect lower or higher interest rates in the near future? Why? Minimum of 500 words.

Describe how interest rates and credit risk affect the yield of corporate and government bonds. Why...

Describe how interest rates and credit risk affect the yield of corporate and government bonds. Why did the yield of Irish government bonds change so dramatically in recent years?

Identify the other macroeconomic factors that affect the general level of interest rates and discuss how...

Identify the other macroeconomic factors that affect the general level of interest rates and discuss how each of these factors affects interest rates

Explain how such factors as home value, down payments, mortgage types, and interest rates affect the...

Explain how such factors as home value, down payments, mortgage types, and interest rates affect the total monthly mortgage payment. Explain if any of these factors surprise you and the reasons why. What strategies could you take to pay the least amount for a house (or healthcare facility) over the life of the loan?

Analyze how interest rates and inflation affect different investment instruments and investor decisions. Give specific examples...

Analyze how interest rates and inflation affect different investment instruments and investor decisions. Give specific examples from the New York Stock Exchange and the London Stock Exchange to support your answer. For example, how do inflation and interest rates affect stock, bond, and mutual fund returns in each market? How does that, in turn, affect business and individual short- and long-term investment planning?

Under the liquidity preference (money market) framework, how will the following events affect real interest rates?...

Under the liquidity preference (money market) framework, how will the following events affect real interest rates? Show your answer using graphs. The economy enters a recession. The Federal Reserve decreases the nominal money supply. The price level decreases. The price level and the nominal money supply both decrease by 17 percent.

Money Market Why do people demand to hold money? How do interest rates affect...

Money Market Why do people demand to hold money? How do interest rates affect demand? Know how the chain of events works when the Fed decides to affect market outcomes. Fed Action à MS changes à Interest rate changes à Investment changes àAD changes à Prices/Output changes How much of an effect does a change in interest rates have on aggregate demand. What are some of the constraints on monetary policy? Relate to the Great Depression. ...

How do interest rates affect our lives? Interest rates are one way to express the price,...

How do interest rates affect our lives? Interest rates are one way to express the price, or cost, of money obtained from someone else. For example, your credit card lends you money every time you make a purchase. Think about how interest rates affect your personal financial behavior with regard to spending and saving. Think also about the relationship between changing interest rates and longer-term interest-bearing securities (bonds, mortgages, etc.), and how interest rates affect our lives in general. Answer...

How will a growing budget deficit affect the economy? Your answer should discuss interest rates, private...

How will a growing budget deficit affect the economy? Your answer should discuss interest rates, private investment, and aggregate expenditure. 8.5.2

6. Inflation, interest rates, and exchange rates Relative inflation rates affect interest rates, exchange rates, the...

6. Inflation, interest rates, and exchange rates Relative inflation rates affect interest rates, exchange rates, the overall economic health of a country, and the operations and profitability of multinational companies. Consider the following statement: Countries with lower inflation rates will have lower interest rates. Based on your understanding of the relationship between relative inflation rates and exchange rates, identify whether the preceding statement is valid or invalid. The statement is valid, because the nominal interest rate is the sum of...

Question