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If the government guaranteed the payment of bonds, what would happen to their prices? Think about...

  • If the government guaranteed the payment of bonds, what would happen to their prices? Think about risk vs. return and demand, and the impact on the bond interest rates.
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Answer #1

The price of a bond is dependent on the riskiness of the bond. The higher the risk, the lower the price, and hence higher the yield. Conversely, the lower the risk, the higher the price, and hence lower the yield.

This is because the riskier the bond is, the higher the yield as the investors demand a higher rate of interest to compensate the risk associated with the bond. Hence, if government guarantees the payment of any bond, the price would increase, leading to a decrease in the bond interest rate.

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