Marcoeconomics
posted by David .
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 demandsupply 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 demandsupply anysis, thx!

My logical deduction is: asset demand for money + transaction demand for money= money demand=supply of bond(as bond issuers create supply of bonds)

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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