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Bond prices move to clear the market for outstanding bonds. Explain and graph it.

Bond prices move to clear the market for outstanding bonds.

Explain and graph it.

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Answer #1

Suppose the demand of the bonds go up due to any external factor, the demand curve shifts right form D1 to D2.

Thus the price of bonds go up. This way less people now can afford it and thus the demand comes down to equilibrium.

Price is inversely proportional to interest rate.

thus when there are outstanding bonds in market, interest rate goes up. People get attracted and demand increases. And thus shifts the demand curve to increase the price to get to new equilibrium

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