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Unformatted text preview: the reduces price and increases in the interest rates on the bond an increase in expected inflation shifts the bond supply curve to the right this reduces price and increase in the interest rates on the bond Factors that shift bond demand a fall in expected inflation shift the bond demand curve to the right, increasing demand at each price and lowering the yield and increasing the bond's price if the expected return on bond rises relative to the return on alternative investments, the demand for bonds will rise this will increase bond prices and lower yields if a bond becomes less risky relative to alternative investments, the demand for the bond shifts to the right when bond becomes more liquid relative to alternatives, the demand curve shifts to the right bond and risk source of bond risk default risk inflation risk interest rate risk default risk inflation risk government bond: default risk = 0 I = r + expected inflation + inflation risk...
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- Spring '08