Question

Explain how factors affecting bond market is able to explain the movement of interest rates.

Answer 1

Demand and supply forces in the bond market together determine the price of bond. Changes that occur in the price of bond influence the interest rate because the price of bond and the rate of interest are inversely related. this happens to be the case because the bond market and the loanable funds market are also related inversely. Factors that affect the demand in bond market affect the supply in loanable funds market. This indicates that if demand is increased in bond market which increases the price of bond, the supply in the loanable funds market will also increase simultaneously decreasing the rate of interest. this shows that those factors that influence the bond prices also influence the movement in the rate of interest.