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Unformatted text preview: Bond Market Equilibrium Interest Rates Market for Money: LPF Equilibrium Interest Rates in LPF F −P
P In this case, the interest rate also equals the expected rate of return:
i = Re. i= Consider a 1 year discount bond with face value $1000. The interest
rate (yield to maturity) is Example: At lower prices (higher interest rates), ceteris paribus, the
quantity supplied of bonds is lower: a positive relationship At lower prices (higher interest rates), ceteris paribus, the
quantity demanded of bonds is higher : an inverse relationship The Bond Market: Supply and Demand Asset Demand ...
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