Question 5.LL: In your own words, explain to your grandmother why the value...

Engineering Economy [EXP-20136]

In your own words, explain to your grandmother why the values of various government bonds go up when the interest rates in the U.S. economy drops.

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Because the face value (what a bond is worth at maturity) of a bond and its interest payout are fixed, the trading price of a bond will increase as interest rates go down. This is because people are willing to pay more money for a bond to obtain the fixed interest rate in a declining interest rate market. For instance, if the bond pays 8% per year, people will pay more for the bond when interest rates in the economy drop from, for example, 6% to 5% per year.

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