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?

Introduction

Learning Objectives

  1. Explain and illustrate how the bond market works and discuss the relationship between the price of a bond and that bond's interest rate.
  2. Explain and illustrate the relationship between a change in demand for or supply of bonds and macroeconomic activity.
  3. Explain and illustrate how the foreign exchange market works and how a change in demand for a country's currency or a change in its supply affects macroeconomic activity.

In this section, we will look at the bond market and at the market for foreign exchange. Events in these markets can affect the price level and output for the entire economy.


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