My boss and i were having an arguement if int. rates would go up or down. I was trying to explain him in economics (Thanks to Reshmi mitra and Veena pailwar, prof. of eco in xlri). I came up with this explanation. I hope i meet their standards ;)
Usually, when rates are going up, investors avoid mid- and long-term bonds, even though they yield more than short-term ones, because when interest rates go up, the price of existing bonds goes down. The longer the term of the bond, the bigger the loss.
The soft patch lured many investors into longer-term bonds. That demand kept the prices of these bonds up and their yields, which move in the opposite direction, down.
So, as the demand of the bonds go up, the interest earned (read it as a net interest rate) of the bond will go down
Imagine this scenario.You bought a bond in 2004 at 100 Rs/-
Value of the bond would be 100 rs/- - profit earned
So, if you earned a dividend of 10 Rs/-
The real value of the bond is now 90 coz you have already got your 10.
So, the more the int rate , the lesser the value J & vice-versa the more the value , the lesser the int. rate !!
So, if people are investing madly on a long term bond , that means the bond will be in demand. So the value of the bond is high and once the value of the bond is high
The int. rate will fall down !!!
This explains why the int. rate of the home loan would not go up or did not go up !!
