5 Questions
What is the theoretical model used to explain the nominal rate of interest in the bond market?
Theory of asset demand and supply, loanable funds framework
What is the simplifying assumption made in the theoretical model of bond demand and supply?
There is only one type of security and a single interest rate
What factors influence the demand curve for bonds in the bond market?
Expected inflation, income level, and wealth
What factors influence the supply curve of bonds in the bond market?
Government budget deficits, corporate issuance, and technological advancements
In the bond market, what happens when there is an increase in expected inflation according to the theoretical model?
The demand for bonds decreases and the supply of bonds increases
Study Notes
Theoretical Model of Bond Market
- The theoretical model used to explain the nominal rate of interest in the bond market is the Loanable Funds Theory.
Simplifying Assumption
- The simplifying assumption made in the theoretical model of bond demand and supply is that all bonds are identical and have the same risk.
Factors Influencing Demand Curve
- The demand curve for bonds in the bond market is influenced by:
- Changes in the expected rate of return
- Changes in wealth
- Changes in the state of the economy (recession or expansion)
Factors Influencing Supply Curve
- The supply curve of bonds in the bond market is influenced by:
- Changes in the expected rate of return
- Changes in the cost of borrowing
- Changes in the state of the economy (recession or expansion)
Effect of Expected Inflation
- When there is an increase in expected inflation in the bond market, the demand for bonds decreases, and the supply of bonds increases, resulting in an increase in the nominal interest rate.
Test your knowledge of bond characteristics and yields with this quiz covering topics such as fixed income securities, interest rate calculations, bond prices, and the demand and supply dynamics in the bond market. This quiz is based on the book "Fixed Income Securities" by Kirsten Ralf.
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