econ330ch6notes

econ330ch6notes - the reduces price and increases in the...

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ch6 Bond supply: from the views of investors, the higher the price, the more tempting it is to sell a bond they currently hold. From the views of companies, seeking financial for new project, the higher the price at which they can sell bonds, the more advantageous it is to do so. Bond demand the lower the price potential bondholders must pay for a fixed-dollar payment on a future date, the more likely they are to buy a bond the zero coupon bond promising to pay $100 in one year will be more attractive at $90 then it will at $95. all other things being equal Factors that shift bond supply any increase in the government's borrowing needs increase the quantity of bonds outstanding, shifting the bond supply curve to the right the reduces price and increases the interest rate on the bond as business conditions improve, the bond supply curve shifts to the right this reduces price and increase the interest rate on the bond an increase in expected inflation shifts the bond supply curve to the right
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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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