Jan Henryck O.

Rodriguez

Required: Explain the behavior of market interest rates and identify the forces that cause
interest rates to change.

When the company´s market interest rates slightly or drastically increase, the company´s market
value of an existing bond decreases. Then the company´s market interest rates decrease, and
the market value of an existing bond increases.
Since the bonds are fixed-income securities that affect the market rates and value but the bond
has little changes when market interest rates decrease or increase. The Bond's price is the
present value of each cash flow, wherein the present value of each cash flow is measured using
the yield When a bond's yield rises, its price falls, and when a bond's yield falls, its price
increases. To explain in better terms, Bond Price=(Coupon×1−(1+r)−nr)+Par Value(1+r)n Price =
( Coupon × 1 − ( 1 + r ) − n r ) + Par Value ( 1 + r ) n , where: Coupon is the cash flow received
for each intermediate payment before the par value. There are different factors that affect
interest changes. For instance, there are binds that are highly volatile bonds which give us a
high rate of risk and return. The rules of supply and demand apply to the changing of interest
rates. An increase in demand will also increase the interest rates which affects the bond price, in
the supply, it is inverse which it gave credit if there is less supply so the interest rates will
increase. The more a company demands bonds, gives more interest rate to the investor which
can be also volatile. The government have also the influence of the changes of the increase of
interest rates. They issue inflation-indexed bonds which adjust when inflation happens. It
connects to the inflation that results in the rise of the market rates.

To conclude, Interest rates, bond yields (prices), and inflation have an interconnection with one
another. Movements in short-term interest rates, as dictated by a nation's central bank, will
affect different bonds with different terms to maturity differently, depending on the market's
expectations of future levels of inflation.