Question

Assume the market for bonds is in equilibrium - the curves of demand and supply determine the equilibrium bond prices and the equilibrium interest rate. Suppose that the federal government were to offer larger tax breaks on the purchase of new equipment for businesses, all other factors constant. Use the model of supply and demand for bonds to explain the change in the market - which curve will shift and in which direction. Clearly explain the change in the equilibrium bond prices and the level of the interest rates

Answer 1

Securities have a converse relationship to the interest rate; when financing costs rise, bond costs fall, and the other way around, whenever the Federal government reduced the interest rate, it is the best time to sell the fixed income securities and invest into the equity. Most securities pay a fixed interest rate, if financing costs when all is said in done fall, the security's financing costs become progressively attractive, so individuals will offer up the cost of the bond.In like manner, if interest rate rises, individuals will no longer incline toward the lower fixed financing cost paid by a bond, and their cost will fall.As a rule, bonds are guaranteed a fixed measure of cash in non-expansion balanced money. The more inflation, the less important they future installments become. The less expansion, the more significant their installments. As the price rises the demand curve shifts to left and supply curve shifts to the right. Higher inflation desires decline interest for bonds and increment their gracefully. The two variables bring about lower security costs and higher loan fees.Lower inflation desires increment interest for bonds and reduction their gracefully. The two variables bring about higher security costs and lower financing costs.