The effect of T-bond interest rate on the bond market: a case study on Bank Asia PLC

Abstract

This study examines the effect of Treasury bond (T-bond) interest rate movements on the bond market, with a specific focus on Bank Asia PLC. In Bangladesh, T-bond yields act as the primary benchmark for pricing corporate and bank-issued bonds. Any fluctuation of interest rates of government securities will have a direct effect on the cost of funds, demand of funds and yield expectations in the bond market. The results show that the increase in the interest rates of T-bonds makes the required returns on the bond of the Bank Asia PLC to rise, which result in high coupon rates and low prices of bonds in the secondary market. On the other hand, decreasing T-bond yields reduce the cost of financing to the bank and encourage investor and corporate bonds demand because they want to get higher returns than government securities. The paper also notes that the bond issuance strategy of Bank Asia is more or less in tune with the monetary policy position of Bangladesh Bank, and the current trend of T-bond yields. In general, the interest rates of T-bonds have a significant effect on the bond pricing, the issuance of the bonds and demand by the investors of Bank Asia PLC.