Question

Which factor(s) below would not explain the movement in the bond market model? an increase in...

Which factor(s) below would not explain the movement in the bond market model?

an increase in wealth
a decrease in expected interest rates
a decrease in expected inflation
a decrease in the riskiness of bonds
an increase in their price

Homework Answers

Answer #1

Increase in wealth is a factor that doesn’t affect the bond market. There is an inverse relationship between interest rate and price of bond. A higher interest rate makes bonds more attractive to lenders and less attractive to borrowers, that leads to lower prices. Also, higher the inflation, the less valuable the future payments to bond holders become. When inflation expectations falls, investors are more willing to lend money. Demand rises, bond prices rise, and interest rates fall. On the other hand the supply falls. This causes higher bond prices and lower interest rates.

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