Marcoeconomics

posted by .

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 -

    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 -

    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.

Respond to this Question

First Name
School Subject
Your Answer

Similar Questions

  1. Finance

    Thr rate of return you would get if you bought a bond and held it to its maturity date is called the bond's yield to maturity. If interest rates in the economy rise after a bond has been issued, what will happen to the bond's price …
  2. Finance

    The Carter Company's bond mature in 10 years have a par value of 1,000 and an annual coupon payment of $80. The market interest rate for the bond is 9%. What is the price of these bonds The coupon rate on the bond, (interest/principal …
  3. Finance

    A 12-year bond has an annual coupon rate of 9%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 7%. Which of the following statements is CORRECT?
  4. Marcoeconomics

    if Bond price= the discounted value of all the future income it will generate then does it mean that the buyer of the bond earn nothing?
  5. Finance

    Demand of Bonds Point Price of bond Interest rate (i) Demand A $925 (1000 - 925)/ 925 = 8.1% $100 billion B $800 (1000 - 800)/ 800 = 25% $400 billion Table 2: Supply of Bonds Point Price of bond Interest rate (i) Demand A $925 8.1% …
  6. Finance

    Answers for a 10 year us treasury bond has a 3.50 % interest rate, while a same maturity corporate bond has a 5.25 % interest rate. Real interest rates and inflation rate expectations would be for the two bonds. if default risk premium …
  7. Finance

    Heinz Corporation bonds carry a coupon of 8% and will mature in 5 years at $1,000. Newly issued 5-year bonds with similar characteristics are yielding 4%. Calculate today's market price of the Heinz bond. Compute your answer, submit …
  8. Finance

    Heinz Corporation bonds carry a coupon of 8% and will mature in 5 years at $1,000. Newly issued 5-year bonds with similar characteristics are yielding 4%. Calculate today's market price of the Heinz bond. Compute your answer, submit …
  9. accounting

    Heww Inc., issued a $50,000, 10 year bond with a stated interest rate of 6%. Assume interest payments are made semi-annually. What is the selling price of the bond if the market rate of interest is 5%?
  10. finance

    Usha Manufacturing Co. has a bond of $1000 par value outstanding. It pays interest annually and carries an annual coupon rate of 8%. Bonds are issued 2 years ago & due in 10 years. If the market rate of return on bonds is 7%. Required: …

More Similar Questions