Economics Dictionary of ArgumentsHome
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| Bonds: In economics, bonds are debt securities issued by governments, corporations, or other entities to raise capital. Bondholders lend money in exchange for periodic interest payments and the return of the principal at maturity. Bonds are used to finance projects or operations and are considered lower-risk investments compared to stocks. See also Capital._____________Annotation: The above characterizations of concepts are neither definitions nor exhausting presentations of problems related to them. Instead, they are intended to give a short introduction to the contributions below. – Lexicon of Arguments. | |||
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Murray N. Rothbard on Bonds - Dictionary of Arguments
Rothbard III 445 Bonds/Rothbard: Long-term I.O.U.‘s can also be bought and sold in a market. Most of these long-term debts are called bonds, and they are traded in a flourishing and flexible bond market. The fixed rate of interest at the beginning is unimportant. Thus, a 100-ounce long-term loan is contracted at 5-percent fixed interest, or five ounces per year. If the general interest rate rises, people will tend to sell their bonds, which have been yielding them only 5 percent, and invest their money elsewhere—either in whole firms, stocks of firms, or short-term loans. This increased willingness to sell bonds—an increased supply schedule—depresses the price of the bond until the interest yield to the buyer is the same as the general interest rate elsewhere. Thus, if the general interest rate goes up from 5 percent to 10 percent, the price of the bond will fall from 100 to 50, so that the fixed annual return of 5 will provide an interest yield of 10 percent. The important element in bond investment is not the original interest rate (the fixed return on the so-called “par value” of the bond), but the interest yield on the market price of the bond. A general lowering of the interest rate will, on the other hand, raise the bond prices above par and push yield below 5 percent. As the day of redemption of the bond draws near, the market price of the bond will, of course, rapidly approach the par value, until it finally sells at par, since the amount redeemed will be the original par value, or principal, of the loan. Rothbard III 446 It is clear that, in the ERE, the interest rates for all periods of time will be equal. >Evenly Rotating economy. The tendency toward such equality at any one time, however, has been disputed in the case of expected future changes in the interest rate. Although surprisingly little attention has been devoted to this subject, the prevailing theory is that, on the loan market, there will not be a tendency toward equalization if a change in interest rates is expected in the near future.(1) Suppose that the interest rate is now 5 percent, and it is expected to remain there. Then the interest rate on loans of all maturities will be the same, 5 percent. Suppose, however, that the interest rate is expected to increase steadily in the near future, say to increase each year by 1 percent until it will be 9 percent four years from now. In that case, since the short-run rate (say the rate of interest on loans lasting one year or less) is expected to increase over the next four-year period, then the present long-run rate for that period - e.g., the present rate for five-year loans - will be an average of the expected future short-run rates during this period. Thus, the present rate on five-year loans will be 5 percent plus 6 percent plus 7 percent plus 8 percent plus 9 percent divided by 5, equaling 7 percent. The long-run rate will be the average of short-run rates over the relevant period. Consequently, the long-run rates will be proportionately higher than short-run rates when the latter are expected to increase, and lower when the latter are expected to be lower. RothbardVs: This, however, is a completely question-begging theory. Suppose that a rise in interest rates is expected; why should this be simply confined to a rise in the short-term rates? Why should not the expectation be equally applicable to long-term rates so that they rise as well?(2) Rothbard III 447 Problem: The theory rests on the quite untenable assumption that it sets out to prove, namely, that there is no tendency for short-term and long-term rates to be equal. The assumption that a change in the interest rate will take place only over the short term is completely unproved and goes against our demonstration that the short-run and long-run rates tend to move together. Changing interest rates: What happens if the interest rate is expected to change in the near future? In that case, there will be a similar process as in the case of speculation in commodities. Speculators will bid up the interest rate in the expectation of an imminent rise or bid down the rate in expectation of a fall. Clearly, the earlier a rise or fall is expected to take place, the greater proportionately will be the effect on the speculators, and the greater impact it will have on current movement in the rate. In the case of a commodity, stocks would be withheld in expectation of a rise in demand and price, and then released, thereby effecting a more rapid transition to the price eventually established by underlying supply-and-demand forces. Similarly, in this case money will tend to be withheld from investments and held in cash balances until the rate reaches its expected higher level, or dislodged from cash balances and added to investment if the rate of interest is expected to be lower. 1. Thus, cf. Friedrich A. Lutz, “The Structure of Interest Rates” in Readings in the Theory of Income Distribution, pp. 499–532. 2. Since the writing of this text, Professor Luckett has published a critique of Lutz similar in part. See Dudley G. Luckett, “Professor Lutz and the Structure of Interest Rates,” Quarterly Journal of Economics, February, 1959, pp. 131-44. Also see J.M. Culbertson, “The Term Structure of Interest Rates,” ibid., November, 1957, pp. 485-517._____________Explanation of symbols: Roman numerals indicate the source, arabic numerals indicate the page number. The corresponding books are indicated on the right hand side. ((s)…): Comment by the sender of the contribution. Translations: Dictionary of Arguments The note [Concept/Author], [Author1]Vs[Author2] or [Author]Vs[term] resp. "problem:"/"solution:", "old:"/"new:" and "thesis:" is an addition from the Dictionary of Arguments. If a German edition is specified, the page numbers refer to this edition. |
Rothbard II Murray N. Rothbard Classical Economics. An Austrian Perspective on the History of Economic Thought. Cheltenham, UK: Edward Elgar Publishing. Cheltenham 1995 Rothbard III Murray N. Rothbard Man, Economy and State with Power and Market. Study Edition Auburn, Alabama 1962, 1970, 2009 Rothbard IV Murray N. Rothbard The Essential von Mises Auburn, Alabama 1988 Rothbard V Murray N. Rothbard Power and Market: Government and the Economy Kansas City 1977 |
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