Posted by **David** on Sunday, February 15, 2009 at 12:06pm.

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!

- Marcoeconomics -
**David**, Sunday, February 15, 2009 at 12:21pm
My logical deduction is: asset demand for money + transaction demand for money= money demand=supply of bond(as bond issuers create supply of bonds)

- Marcoeconomics -
**economyst**, Tuesday, February 17, 2009 at 9:13am
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.

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