Presentation_2-4_marked - Securities market models Econ 230...

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Securities market models Econ 230 Financial Markets and Institutions Prof. Cahill Fall 2009
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The bond market model Supply and demand for securities (bonds) determined the equilibrium interest rate Can construct market for any level A single bond All bonds from a corporation All private or govt) bonds All bonds
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The bond market Interest rate i on y- axis Quantity of bonds sold ( B ) on x -axis Up is to the right! Quantity of Bonds, B Interest Rate, i (%) Increase
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Demand for bonds Movements along curve hold all other factors constant As i increases quantity of bonds demanded rises Expected return higher for same risk, etc. P falls B i B d
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Shifts in demand for bonds Wealth Relative liquidity Fed buys bonds Exp. interest rate (in future) Expected inflation (in future) Relative riskiness Fed sells bonds B i B 1 d B 2 d B i B 2 d B 1 d
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Treasury bond supply Treasury bonds are sold to finance deficits The total T-bond supply is the national debt The interest rate is not a factor
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Presentation_2-4_marked - Securities market models Econ 230...

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