What happens to Bond prices, quantities and interest rates if there is a... a) Decrease in...

What happens to Bond prices, quantities and interest rates if there is a...

a) Decrease in wealth

b) Increase in risk

c) Decrease in liquidity

Expert Solution

EFFECTS :	Decrease in Wealth	Increase in risk	Decrease in liquidity
Bond prices	If there would be less money in market to invest people will not buy asset. Decrease in wealth results in decrease in demand which results in decrease in bond prices.	If the risk is more in an inverstment as compared to its returns people will buy less risky assets. Increase in risk results in decrease in demand of bond which results in Decrease in bond prices	Liquidity refers to how fast it can sell in the market . so, if the Liquidity decreases for bonds people will switch to more liquid assets and this will result in Decrease in demand which will lead to Decrease in Bond prices .
Interest rates	Decrease in wealth results in decrease in demand which results in Increase in interest rates .	Increase in risk results in decrease in demand of bond which results in Increase in interest rates. (For instance risk of inflation , which leads to higher interest rates which is negative for bonds)	Decrease in liquidity results in decrease in demand which leads to Increase in interest rates .
Bond quantities	Decrease in wealth results in Decrease in quantities.	Increase in risk results in Decrease in quantities of bond .	Decrease in liquidity results in Decrease in quantities.

NOTE: Price of bond and interest rate have inverse relationship if one rises other will decrease and vice versa.

Price and quantity of bond have direct relationship if one decreases other will decrease and vice versa.

ekkarill92 answered 2 years ago

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