ASSIGNMENT 2

Why do bond price fall when interest rate rises?

When interest rate rises, people would expect higher return in bonds than
before because the opportunity cost of holding bond rises (same amount of investment will give
higher return in banks than from a bond). But the yield of the bond isn’t changed and so promised
return of bond doesn’t also change. Thus, for the same return, people would pay less for a bond than
before for that same amount of return from that bond. Thus, as interest rate rises, bond price will fall.
ASSIGNMENTS: MACROECONOMICS
SAYAN MAITY (ACTUARIAL ECONOMICS)

ASSIGNMENT 1
The INR/$ exchange rate was approximately 20 Rs. / 1$ 25 years ago
a. Why has the rupee depreciated so much over time vis-à-vis the dollar?

The value of exchange rate is determined by the forces of demand and supply in
the market for foreign exchange. If demand rise or supply falls exchange rate will also depreciate.
India’s export (in value) increased less compared to its import. This results a huge
current account deficit for economy. Thus, demand for foreign currency or namely dollar increased
and country had to buy more dollar which reduced the value of Indian currency.
Another source for foreign currency is foreign investment. Due to slow growth
rate, bad government financing & political uncertainty investors lost faith in Indian economy.
Moreover, this reduced the inflow of foreign capital and as a result, supply of dollar reduced.
As supply of dollar falls, an excess demand for dollar is generated. Which push
the price of dollar or exchange rate between rupee and dollar upward

b. What do you expect to happen to the INR/$ exchange rate going forward and why?
The higher exchange rate between INR and dollar makes Indian exports more
competitive. Thus, there will be an appreciation for rupee against dollar. However, to keep our
exports competitive compared to foreign goods, RBI kept the exchange rate to a certain level. Thus
without the presence of any external supply shock(such as disturbance in oil price), exchange rate
will maintain a certain level.