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Lecture 3: Discuss in words and graphs what will happen to bond prices, interest rates, and...


Lecture 3:
Discuss in words and graphs what will happen to bond prices, interest rates, and the dollar volume of bonds issued, due to factors such as: rising inflationary expectation, increased indebtedness, changes in taxation policies, etc. Think in terms of both supply and demand.

Explain graphically, how increased government bond issuance can result in a decrease of corporate bond issuance, and lower corporate bond prices.

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Answer #1

Higher inflation will cause the bond supply curve to shift right and bond demand curve to shift left because of which the bond prices will depress and in turn lead to increase in interest rate. It will also lead to the decrease in value of dollar.

Increase in indebtedness will also lead to an increase in interest rates because of decreased bond prices.

And the change in taxation policies can either lead to increase or decrease in bond prices depending on the nature of the changes. It may lead to an increase in demand for bonds and decrease in supply of bonds.

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