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If the expected return on bonds falls relative to other financial assets, bond prices and the...

If the expected return on bonds falls relative to other financial assets, bond prices and the yield to maturity will decrease. True/False. Explain.

with the graph if it has, please!

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Answer #1


If expected return on bond falls, then demand for bond will decrease shifting the demand curve of bonds from D to D'. This at given supply of bonds (S) will lead to a decrease in price of bonds from P to P' and decrease in equilibrium quantity of bonds from Q to Q'. This decrease in price of bonds leads to an increase in yield to maturity because price of the bond and yield to maturity are inversely related because for the given coupon payment, now the buyer has to pay less for the bonds, so, yield on the bond increases. Thus, the given statement is false.

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