It's true that demographic forces are leading to slower growth in the labour force, which reduces the
neutral interest rate in the economy and increases the chances that monetary policy will be constrained by the lower bound on interest rates.
But it is extremely important to understand: it is the inflation - adjusted risk -
free interest rate in an economy — the real interest rate that is neither stimulative nor contractionary when an economy is operating at full capacity without cyclical forces at play, thus balancing desired savings and investment.
The market price of a strip bond reflects the issuer's credit rating and the present value of the maturity amount which is determined by the time to maturity and the
prevailing interest rates in the economy.
Other
interest rates in the economy are influenced by this interest rate to varying degrees, so that the behaviour of borrowers and lenders in the financial markets is affected by monetary policy (though not only by monetary policy).
The lower
the interest rates in the economy, the higher the present value of the zero - coupon bond, and vice versa.
Setting a high discount rate tends to have the effect of raising other
interest rates in the economy, since it represents the cost of borrowing money for most major commercial banks and other depository institutions.
So if the US government wants to borrow more, that may mean that they will have to pay a higher interest rate on their bonds, and if bond interest rates increase,
all interest rates in the economy increase, including mortgage interest rates.
But if mobile money eventually leads to a diminution of the role which commercial banks play in the financial system, the interest rate transmission mechanism, which relies on movements in short term inter-bank rates being transmitted along the yield curve to all other
interest rates in the economy, will be weakened, which in turn will weaken the transmission mechanism of monetary policy.
The two parameters for fluctuation on the bond price are —
interest rate in the economy and repayment from the borrower.
Then,
the interest rates in the economy fall and newer bonds start getting issued at 8 per cent.
Generally speaking, CD rates follow the trend of
interest rates in the economy.
Since the investment will be primarily debt,
interest rates in the economy will also pay a role.