The equilibrium interest rate is determined by demand and supply of bonds in the bond market. The equilibrium interest rate is the interest rate where demand for bonds and supply of bonds curve intersect each other.
In long run, everything is expected to be priced fairly and being traded at its equilibrium values. If the bond interest rate is currently above or below the equilibrium level, some fundamental factors along with market forces will bring it to the equilibrium. This is a self-correcting mechanism.
Get Answers For Free
Most questions answered within 1 hours.