Bond and Foreign Exchange Markets
As you have already learned, bonds are used to finance specific projects or operations of the issuer. Through these bonds, the issuer is obligated to make payments on the bond in the future. But what determines the bond's price, and what determines the interest paid?
Along with bonds, some investors may consider investing in foreign currency. While doing so, there are a few determinants of what rate currencies will be exchanged. What are these?
The Bond Market
In their daily operations and in pursuit of new projects, institutions such as firms and governments often borrow. They may seek funds from a bank. Many institutions, however, obtain credit by selling bonds. The federal government is one institution that issues bonds. A local school district might sell bonds to finance the construction of a new school. Your college or university has probably sold bonds to finance new buildings on campus. Firms often sell bonds to finance expansion. The market for bonds is an enormously important one.
When an institution sells a bond, it obtains the price paid for the bond as a kind of loan. The institution that issues the bond is obligated to make payments on the bond in the future. The interest rate is determined by the price of the bond. To understand these relationships, let us look more closely at bond prices and interest rates.