THE IMPACT OF INTEREST RATE POLICY ON BOND VALUATION IN FINANCIAL MARKETS: A SYSTEMATIC LITERATURE REVIEW

Abstract

This study aims to analyze the impact of interest rate policy on bond valuation through a systematic literature review (SLR) approach of various empirical studies. The review covers the relationship between interest rate changes, yield curves, market risk, and the response of fixed income instruments across various financial market contexts, including Indonesia. The SLR method follows the PRISMA procedure by examining articles from leading academic databases. The findings indicate that interest rate increases tend to lower bond prices through an increase in the discount rate, while interest rate decreases enhance bond values. The variation in empirical findings shows that bond valuation is also influenced by inflation, yield curve structure, tenor, instrument quality, liquidity, and market risk perception. Analytical models such as the sinusoidal Hull-White model and term structure covariation analysis enrich the understanding of bond dynamics. These findings confirm that interest rate policy is a primary determinant in bond market dynamics and serves as an important basis for investment decision-making and financial policy formulation.