ECON 2035 Chapter : Ch 5
Document Summary
The behavior of interest rates. Outline: interest rate determina7on in the bond market. Changes in equilibrium (shifs in demand & supply: alterna7ve approach liquidity preference. The market for money. The e ect of changing money supply. Asset demand: important factors in asset demand. Wealth: the total resources owned by the individual. (rela7ve) expected return: the return expected over the next period. (rela7ve) risk: the degree of uncertainty associated with the return. (rela7ve) liquidity: the ease and speed with which an asset can be turned into cash. Demand curve: we will focus on one- year discount bonds market. No coupon payments, ,000 face value, 1- yr maturity: holding periods = 1 year. Interest rate = expected return: nota7on: I = yield to maturity. F = face value of the discount bond (= ,000 ) P = today"s bond price. Demand curve: we know that i = 1 = (,000 )/ = 0. 053 = 5. 3%: when p.
