So if a government wants to borrow money it issues bonds at a fixed interest rate at a certain maturity date? How does it know what to set that rate at? Bonds are sold on the secondary market at market value but that is just between private investors right?
How does the secondary market price impact how the government services its debt given they will just offer par 100 at 4%?
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> Bonds are sold on the secondary market at market value but that is just between private investors right?
Let’s say the market value of a government bond on the secondary market is a 4.5% yield. (If it’s a bond that pays exactly 4.5% then it will cost 100. If it pays a higher or lower coupon then its market price will be adjusted so that it yields 4.5% when purchased)
If the government goes and offers to sell new bonds on the market at the par price of 100 and is only offering 4% interest, who is going to buy them? If you’re an investor, it’s much better for you to just buy the existing bonds on the market which give you a 4.5% return. If the government wants to sell new bonds it’s going to have to offer a rate that is competitive with the bonds that are currently on the market.
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