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5 Cards in this Set
- Front
- Back
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when the price of bonds increases, how many bonds are the buyers willing to purchase
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As the bond price rises, the quantity demanded falls. When the price of the bond rises, buyers are willing to purchase fewer bonds because the rate of return on bonds is lower.
For a coupon bond, the coupon payments and the face-value payment are fixed. Therefore, when the price of the bond rises, the buyer pays more but receives the same dollar amount in future interest and principal payments. Measured per dollar invested, therefore, the return is lower. |
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The theory of asset demand is used to show how the quantity demanded of a bond, the bond price, and the bond interest rate are related. The question below applies this theory to a one-year bond with a given face value.
True or False: When a bond's interest rate increases, its current price also goes up. |
False
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when does equilibrium in a bond occur?
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The equilibrium in the bond market occurs wherever the quantity demanded equals the quantity supplied, so there is no excess demand or excess supply
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how do you illustrate the effect of a decrease in the demand for bonds?
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As bond demand falls, so the equilibrium price of bonds falls and the equilibrium interest rate increases.
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Suppose that the government reduces corporate taxes, thereby increasing the net expected profit from investment projects run by businesses. Businesses respond by borrowing more. illustrate how this corporate tax cut affects the bond market.
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The reduction in corporate taxes means that businesses pay less tax to the government on profits earned from their investment projects. Because the expected profit from these investment opportunities increases, businesses are willing to borrow more, all else being equal. This causes an increase in bond supply
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