Question

(Need Short response)

These are the factors that cause a shift in the demand for bonds: Wealth, Expected Return, Expected Inflation and Risk. Explain how an increase in each of these will cause a change in demand for bonds.

Answer 1

demand for bonds:

• Wealth: If wealth increases people will invest more and more in Bonds. Thus Demand for Bonds will increase.
• Expected Return: As expectation of return increases Demand of Bond will increase people will shift from Savings deposit/risk-free assets to a comparatively higher risky assets like Bond.
• Expected Inflation: If Expected Inflation keeps on rising corporate will keep on issuing new bonds to meet requirement of excess cash. Which inversely affect the bond demand i.e Demand of Bond will decrease.
• Risk: As Risk taking capacity increases of investors will invest in a comparatively higher risky assets like Bond. So the Demand for Bond will increase.