Chapter Five Notes

Wealth o positively related to its expected return

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Unformatted text preview: be turned into cash relative to alternative assets □ Holding all other factors constant the demand for an asset is o Positively related to wealth o Positively related to its expected return relative to alternative assets o Negatively related to the risk of its returns relative to alternative assets o Positively related to its liquidity relative to alternative assets Supply and Demand for Bonds □ At lower prices (higher interest rates), ceteris paribus, the quantity demanded of bonds is higher o Inverse relationship □ At lower prices (higher interest rates), ceteris paribus, the quantity supplied of bonds is lower o Positive relationship Market Equilibrium □ Occurs when the quantity (amount) that people are willing to buy (demand) equals the quantity (amount) that people are willing to sell (supply) at a given price Changes in Equilibrium Interest Rates □ Wealth o In an expansion with growing wealth the demand curve for bonds shifts to the right □ Expected Returns o Higher expected interest rates in the future lower the expected return for long term bonds, shifting the demand curve to the left □ Expected Inflation o An increase in the expected rate of inflation lowers the expected return for bonds causing the demand curve to shift to the left □ Risk o An increase in the riskiness of bonds causes the demand curve to shift to the left...
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