Financial Management: Principles and Applications, 13/e

9.5 Determinants of Interest Rates

Bond prices vary inversely with interest rates; therefore, we need to understand what determines interest rates if we want to understand how bond prices fluctuate.

Although we often speak in terms of the rate of interest as a single rate, there are actually many rates of interest that correspond to different types of debt securities. In particular, some interest rates are adjusted for inflation, whereas others aren’t. In addition, there are different interest rates for different terms of maturity. For example, the interest rate or yield to maturity for a bond that matures in 2 years will be different than that for a bond that matures in 10 years. This section also takes a look at the relationship between interest ...