Question

Explain how each of the given factors may affect bond demand and supply during a period of robust economic growth: Wealth, Default risk, and General business conditions.

Answer 1

A. Wealth- wealth is one of the factor which will be impacting the demand and supply the bonds during this phase of rapid economic growth because when there would be a higher amount of wealth in the hands of the people, there will be a rather attracted to invest into equity because at the time of the robust economic growth, equities are offering the high rate of return but they are also trying to allocate their assets to the bonds and they will be trying to invest in bonds in order to diversify their overall portfolio and this diversification will be increasing because various companies will also be offering a higher rate of bond yield at the time of economic growth because they can facilitate a high interest because of higher earning so there will be a higher allocation towards bonds in compared to normal economic recession in early periods.

B. Default risk- at the time of high economic growth, there are very low default risk associated with interest payments because there is a high liquidity present in the system and businesses are making high profits so there is a very low risk related to the default risk at the time of robust economic growth

C. General business condition during economic growth scenarios are forecasted at having a favourable market conditions in order to maximize their profits so businesses will be exposed to lesser risks and their bonds will be more safe at the time of the economic growth as they are less bound to default and general economic conditions will be supportive as the economy will be on a growth trajectory.