Question

Suppose people expect lower interest rates in the future. Use the bond market to explain the impact of this event on interest rates.

Answer 1

In bond market bond prices and interest rates have an inverse relationship.Here in the question it is given that the individuals expect lower interest rates in future.When the rate of interest fall the price of the bonds will increase .When interest rate falls the yied or return will also falls.Thus when the individuals expect the interest rate to get lower in future individuals will buy more bonds at present interest rate.Investors are less likely to purchase the new bonds with lower interest rates .Hence the older bonds price will increase.

In general the interest rate and bonds price have an inverse relationship.