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LectureNote5 - LECTURE FIVE What Determine Interest Rates...

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LECTURE FIVE What Determine Interest Rates? How? ECONOMICS 209 Professor Kevin Huang Vanderbilt University
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5-1 The Behavior of Interest Rates (Nominal) interest rates are negatively related to bond prices They are determined in bond markets Need to analyze the demand for and supply of bonds in order to determine a bond market equilibrium The approach is similar to the standard asset market equilibrium analysis
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5-2 Determinants of Bond Demand Wealth—the total resources owned by individuals Expected Returns—the return expected over the next period on a bond relative to alternative assets ± Expected interest rate ± Expected inflation Risk—the degree of uncertainty associated with the return on a bond relative to alternative assets Liquidity—the ease and speed with which a bond can be turned into cash relative to alternative assets
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5-3 Theory of Bond Demand The demand for a bond is positively related to wealth The demand for a bond is positively related to its expected return relative to alternative assets The demand for a bond is negatively related to the risk of its return relative to alternative assets The demand for a bond is positively related to its liquidity relative to alternative assets
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5-4
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5-5 Determinants of Bond Supply Expected Profitability of Investment Opportunities Expected Inflation Government Budget
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This note was uploaded on 04/07/2008 for the course ECON 209 taught by Professor Professor during the Spring '08 term at Vanderbilt.

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LectureNote5 - LECTURE FIVE What Determine Interest Rates...

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