Question

Suppose your investment portfolio includes cash, bonds, stocks, and real estate. Use supply and demand analysis to demonstrate what will happen to the number of bonds, the price of bonds, and interest rates if stock market returns are increasing?

Answer 1

When the market returns are Increasing, there will be increase in the prices of the bond because When Bond prices will be increasing, it will be meaning that the overall rate of return of the portfolio will be increasing and it will also mean that the number of the bonds will always remain the similar because bonds are not the stocks which can be split,so the number of the bonds will remaining the similar and the prices of the bonds will be going up and the rate of return of the bonds will also be going up.

We always know that there is an inverse relationship between the bond prices and the interest rate so when the bond prices will be going up because the market rate of return is going up, it will mean that the interest rates will be going down in order to compensate for the bond prices which are going up, as there is an inverse relationship which is existent between the bond prices and interest rates so it will mean that the interest rates are going down and the bond prices will be going up and the number of the bonds will be remaining the same.