Question

what are the shifting factor of damend for bond?

Answer 1

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.

• 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.
• The supply curve for bonds shifts due to changes in government budgets, inflation expectations, and general business conditions.
• Deficits cause governments to issue bonds and hence shift the bond supply curve right; surpluses have the opposite effect.
• Expected inflation leads businesses to issue bonds because inflation reduces real borrowing costs, ceteris paribus; decreases in expected inflation or deflation expectations have the opposite effect.
• Expectations of future general business conditions, including tax reductions, regulatory cost reduction, and increased economic growth (economic expansion or boom), induce businesses to borrow (issue bonds), while higher taxes, more costly regulations, and recessions shift the bond supply curve left.
• Theoretically, whether a business expansion leads to higher interest rates or not depends on the degree of the shift in the bond supply and demand curves.
• An expansion will cause the bond supply curve to shift right, which alone will decrease bond prices (increase the interest rate).
• But expansions also cause the demand for bonds to increase (the bond demand curve to shift right), which has the effect of increasing bond prices (and hence lowering bond yields).
• Empirically, the bond supply curve typically shifts much further than the bond demand curve, so the interest rate usually rises during expansions and always falls during recessions.
• Shifts in the Demand for Bonds
• • Wealth—in an expansion with growing wealth, the
• demand curve for bonds shifts to the right
• • Expected Returns—higher expected interest rates in
• the future lower the expected return for long-term
• bonds, shifting the demand curve to the left
• • Expected Inflation—an increase in the expected rate
• of inflations lowers the expected return for bonds,
• causing the demand curve to shift to the left
• • Risk—an increase in the riskiness of bonds causes
• the demand curve to shift to the left
• • Liquidity—increased liquidity of bonds results in the
• demand curve shifting right
• Shifts in the Supply of Bonds
• • Expected profitability of investment
• opportunities—in an expansion, the
• supply curve shifts to the right
• • Expected inflation—an increase in
• expected inflation shifts the supply curve
• for bonds to the right
• • Government budget—increased budget
• deficits shift the supply curve to the right
• Shifts in the Demand for Money
• • Income Effect—a higher level of income
• causes the demand for money at each
• interest rate to increase and the demand
• curve to shift to the right
• • Price-Level Effect—a rise in the price
• level causes the demand for money at
• each interest rate to increase and the
• demand curve to shift to the right
• Assume that the supply of money is
• controlled by the central bank
• • An increase in the money supply
• engineered by the Federal Reserve
• will shift the supply curve for money to
• the right