Question

I. Clear and completely labeled graphs.

II. Clear written statements that explain why markets are changing and what the effect of these changes are on equilibrium values and/or the variables of interest. Any additional questions asked must also be answered.

What should happen to the equilibrium price, interest rate, and quantity of bonds today if people expect that these bonds will be worth half as much in the future? Use the simplified model of the bond market we developed in class. A complete answer will include both a graph and a brief written explanation.

Answer 1

Companies and governments issue bonds to get cash today in exchange for money in the future. Unlike stocks, bonds do not give the owner of the bond any ownership claim—it is only a loan.The value of a bond to the person who buys it is based on its maturity, par value, and coupon payments. Maturity is the length of time until you are paid a fixed amount of money. That fixed amount of money is the par value (sometimes called face value). Sometimes bonds give the owner an occasional payment called a coupon payment.
If the these bonds will be worth half as much in the future in that case the demand for these bond may increase but the supply of bonds will also be increased, therefore there will be a shift in demand curve and the equilibrium price will change.

interest rate will increase in future but today the changes will not be on a hike.

quantity demanded will increases with th shift in demand cure as the shift of demand curve is upward shift.

in the above figure in x axis we measure the quantity of bonds in demand and in the y axis we measure the price of bonds we see that at price p1 quantity demanded is q1 and the equilibrium point is at "a" but as we know that these bonds will be worth half as much in the future the demand for this bond increases and due to which the demand curve shufts from d1 to d2 and as a result the price p2 revails with new quantity demanded being q2 and hence the equilibrium bpoint changes to "b".