What could cause the demand for bonds to decrease (shift to the left)?
46) A factor that could cause the demand for bonds to decrease (shift to the left) is A) an increase in the expected return on bonds relative to other assets. B) a decrease in the expected return on bonds relative to other assets. C) an increase in wealth. D) a reduction in the riskiness of bonds relative to other assets.
What happens to interest rates when the bond supply increases?
Bond supply increases and the bond supply curve shifts to the right. The new equilibrium bond price is lower and thus interest rates will increase. What is the impact on interest rates when the Federal Reserve decreases the money supply by selling bonds to the public?
Why would an expectation of FED rate hikes cause Treasury prices to fall?
The expected return on bonds would decrease relative to other assets resulting in a decrease in the demand for bonds. The leftward shift of the bond demand curve results in a new lower equilibrium price for bonds. Use demand and supply analysis to explain why an expectation of Fed rate hikes would cause Treasury prices to fall.
What is the impact on interest rates when the Fed decreases supply?
The new equilibrium bond price is lower and thus interest rates will increase. What is the impact on interest rates when the Federal Reserve decreases the money supply by selling bonds to the public? The expected return on bonds would decrease relative to other assets resulting in a decrease in the demand for bonds.
What factors cause the demand curve for bonds to shift?
The demand curve for bonds shifts due to changes in wealth, expected relative returns, risk, and liquidity. Wealth, returns, and liquidity are positively related to demand; risk is inversely related to demand. Wealth sets the general level of demand. Investors then trade off risk for returns and liquidity.
What causes the supply of bonds to shift to the right?
Wealth —An increase in wealth causes the demand curve for bonds to shift to the right.
What happens when demand for bonds increases?
Demand rises, bond prices rise, and interest rates fall. Of course, borrowers would prefer to repay their debt with future money that's less valuable than the money they borrowed in the past.
What causes volatility in bond prices?
As with any free-market economy, bond prices are affected by supply and demand. Bonds are issued initially at par value, or $100. 1 In the secondary market, a bond's price can fluctuate. The most influential factors that affect a bond's price are yield, prevailing interest rates, and the bond's rating.
Which of the following would cause the money demand curve to shift to the right?
A market purchase of bonds increases money supply which leads to a decrease in the interest rate. As a result spending increases and the aggregate expenditure line sift upward. The equilibrium output will increase (for all price levels) and the aggregate demand curve will shift to the right.
How does supply and demand affect bond prices?
Supply and demand are the basic determinants of prices for bonds and other financial assets. Bond prices rise when demand outpaces supply and fall when there is insufficient demand. A bond's yield, which is the ratio of annual interest payments to market price, rises when its price falls and falls when the price rises.
Why do bonds go up when stocks go down?
Sometimes, both stocks and bonds can go up in value at the same time. This happens when there is too much money, or liquidity, chasing too few investments. It happens at the top of the market.
What causes price of bonds to increase?
Essentially, the price of a bond goes up and down depending on the value of the income provided by its coupon payments relative to broader interest rates. If prevailing interest rates increase above the bond's coupon rate, the bond becomes less attractive.
Which of the following will decrease the demand for money shifting the demand curve to the left?
by increasing the opportunity cost of holding money, a high interest rate reduces the quantity of money demanded. This is movement up and to the left along the money demand curve.
What does volatility mean in bonds?
The extent to which a bond's price fluctuates due to changing interest rates is called its volatility. A bond's volatility depends on two factors: its coupon rate and when it will be retired (at maturity or call date).
Why bonds are volatile?
Bonds Are Volatile, Too And their prices move in inverse relationship to interest rates. When interest rates rise, prices of currently issued bonds fall, and vice versa. So from year to year, as interest rates for varying categories of bonds move up and down, their prices move down and up.
How are bonds volatile?
Bond rates are lower over time than the general return of the stock market. Individual stocks may outperform bonds by a significant margin, but they are also at a much higher risk of loss. Bonds will always be less volatile on average than stocks because more is known and certain about their income flow.
Which effect is larger, liquidity or other?
A) the liquidity effect is larger than the other effects
What does "c" mean in inflation?
C) a decrease in the inflation rate.
What does "d" mean in bonds?
D) a reduction in the riskiness of bonds relative to other assets.