Please describe the role a bond plays in determining the prevailing interest rate in the financial markets.
Thank you for your time!
2007-12-01 08:12:16 · 5 answers · asked by Erica H 1 in Business & Finance ➔ Investing
I'm not sure any of the previous answers really answered your specific question, which I think is how can you determine the current interest rate level from a bond.
When a bond is sold, it's for a certain amount of money and has a certain interest rate associated with it. Let's use as an example a $1000 bond with a 6% rate. Call it Bond A. That bond will then pay the holder $60 per year (6% of $1000). If prevailing interest rates go down, let's say to 5%, an existing bond paying 6% will be more valuable than a new one paying only 5%, so investors will be willing to buy Bond A for more than $1000 because of the higher amount of interest it pays. On the other hand, if interest rates have risen to 7%, Bond A will be less valuable because of its lower rate, so investors will only pay something less than $1000 to buy it.
Therefore, by knowing what price a bond is selling for in the secondary market, you can get an idea of current interest rates. The actual calculations factor in the bond's interest rate and the amount of time until it matures, but financial information sources will often list not only the price the bond is selling for, but also the "yield to maturity" which is the effective rate that the bond is paying if you bought it for the currently quoted price.
2007-12-01 10:42:45 · answer #1 · answered by Dave W 6 · 0⤊ 0⤋
Actually u should have considered asking this question the other way around...like what role does the prevailing interest rates have in the financial markets....
its simple logic...as n when there is increase in the interest rates the bond values come down...and when the interest rates comes down the bond values goes up...
2007-12-01 08:30:15 · answer #2 · answered by Rapa 6 · 0⤊ 0⤋
Depending on the type of bond being offered and by whom will often establish the interest rate.. Municipal bonds for entities classified AAA will be paying lower rates than BB of bb due to outstanding bond debt, For industrial bonds, rates may vary due to the financial strength of the offerer. Risky pays higher than not risky. In certain cases when numerous offers of bonds are available, rates may be affected in the auction process ,in many cases ,lowering rates.
2007-12-01 08:27:55 · answer #3 · answered by googie 7 · 0⤊ 0⤋
In simple term, a bond is a loan and YOU are the lender.
2007-12-01 15:52:30 · answer #4 · answered by In My Humble Opinion 2 · 0⤊ 0⤋
to fund the government.
2007-12-01 09:13:28 · answer #5 · answered by Anonymous · 0⤊ 0⤋