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Chapter 5: Q.10 (page 164)

Suppose that many big corporations decide not to issue bonds, since it is now too costly to comply with new financial market regulations. Can you describe the expected effect on interest rates?

Short Answer

Expert verified

Bond prices will rise, lowering interest rates, as supply and interest rates have an indirect relationship.

Step by step solution

01

Introduction

The amount demanded of an asset is directly related to wealth, expected return on asset, and liquidity of the asset, and negatively proportional to expected return on alternative asset, liquidity of the alternative asset, according to the theory of portfolio choice.

02

Ste[p 2: Explanation

If large corporations decide not to issue bonds, the supply curve for bonds will shift to the left, indicating a decrease in supply. As a result of the reduced supply, bond prices will rise, lowering interest rates, as supply and interest rates have an indirect relationship.

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Most popular questions from this chapter

Suppose you visit with a financial adviser, and you are considering investing some of your wealth in one of three investment portfolios: stocks, bonds, or commodities. Your financial adviser provides you with the following table, which gives the probabilities of possible returns from each investment.

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