Market Equilibrium Case Study

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Q1:
When selling bonds, suppliers may have a desire to sell bonds either at the highest price possible or at the lowest price that would still be of benefit. Alternately, buyers of bonds would wish to buy the lowest price possible, but may be willing to pay a higher price depending on the conditions. The point where the best interests of bond sellers and bond buyers meet, that is the point where “the amount of bonds that people are willing to buy equals the amount of bonds people are willing to sell at a given price,” is known as market equilibrium (Mishkin & Eakins, 2012, p. 70). Understanding market equilibrium and what factors affect where it falls is important within the study of supply and demand for the Bond Market for multiple reasons.
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64). Out of the four factors that impact the demand for assets, risk is the only one that has a negative effect on the demand for assets. In other words, as the degree of risk associated with obtaining or holding a particular asset increases, the desirability to obtain or hold that asset will decrease. The fourth variable, known as liquidity, is a measure of how easily an asset can be turned into cash (Mishkin & Eakins, 2012). An example of poor liquidity at work would be an asset that holds a high value, but could not be readily exchanged for cash due to needing the right type of market and or buyer to be sold. Alternately, an example of good liquidity at work would be U.S. Treasury bills being that they can be “sold quickly at a low cost” (Mishkin & Eakins, 2012, pp. 67-68). In summary, the rise and fall in the demand on assets can be traced to a positive or negative change in one of the aforementioned …show more content…
A simple loan is characterized by a loan being granted to a borrower with the agreement that the loan will be paid back on a set date with an additional fee that may take the form of interest. A simple loan may take the form of a commercial loan being granted to a business (Mishkin & Eakins, 2012). Another type of credit market instrument is the fixed-payment loan, which may also be referred to as a fully amortized loan where the borrower repays the loan in periodic payments for a set period of time. Included in each of these periodic payments is a fraction of the overall interest being charged for the loan. Common examples of fixed-payment loans are auto loans and mortgages (Mishkin & Eakins, 2012). The third type of credit market instrument is known as a coupon bond. Coupon bonds are market instruments that pay the holder “a fixed interest payment (coupon payment) every year until the maturity date” at which time the holder is paid the face value of the bond (Mishkin & Eakins, 2012, p.39). To identify a coupon bond, three key pieces of information are needed which include: the name of the entity that issued the bond, the bond’s coupon rate, and the bond’s maturity date. “U.S. Treasury notes and bonds and corporate bonds” are some of the more commonly known forms of corporate bonds (Mishkin & Eakins,

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