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Put it simply, the interest rate depends on the forces of demand and supply of money. When the Fed buy bond, it increases the money supply into the economy. To induce the people to borrow more money bank reduces their own interest rate, otherwise, people won't have any incentives to borrow more. The interest rate is reduce to such level again equilibrium is ...


Your confusion is certainly coming from a distinction between Price and Yield. 1 - You're definitely right in regards to Bond Price as 99 1/8 = 99.125. Likewise 99 1/32 = 99.0313 (assuming 100 PAR). It's worth highlighting on the fact that this convention is only applicable to US bond prices, as far as I am concerned. 2 - By contrast, Bond Yield is the ...

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