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SHIFTS IN EQUILIBRIUM IN THE BOND MARKET & RISK |
| << YIELD TO MATURIRY:Current Yield, Holding Period Returns |
| BONDS & SOURCES OF BOND RISK:Inflation Risk, Bond Ratings >> |
Money
& Banking MGT411
VU
Lesson
15
SHIFTS
IN EQUILIBRIUM IN THE BOND
MARKET & RISK
Shifts
in Equilibrium in bond
market
Bond
and Risk
Default
Risk
Inflation
Risk
Interest
Rate Risk
Shifts
in Equilibrium
An
increase in expected
inflation:
An
increase in expected inflation shifts
bond supply to the right and
bond demand to the
left.
The
two effects reinforce each
other, resulting in a lower
bond price and a higher interest
rate
Figure:
Effect of an increase in expected
inflation
So
S1
Eo
Po
P1
E1
Do
D1
Quantity
of Bonds
A
business-cycle downturn:
A
business-cycle downturn shifts the
bond supply to the left and the
bond demand to the
left.
In
this case the bond price
can rise or fall, depending on
which shift is
greater.
But
interest rates tend to fall in
recessions, so bond prices
are likely to
increase
49
Money
& Banking MGT411
VU
Figure:
Effect of a business cycle
down turn
S1
So
E1
P1
Eo
Po
Do
D1
Quantity
of Bonds
Bonds
and Risk
Sources
of Bond Risk
Default
Risk
Inflation
Risk
Interest-Rate
Risk
50
Table of Contents:
- TEXT AND REFERENCE MATERIAL & FIVE PARTS OF THE FINANCIAL SYSTEM
- FIVE CORE PRINCIPLES OF MONEY AND BANKING:Time has Value
- MONEY & THE PAYMENT SYSTEM:Distinctions among Money, Wealth, and Income
- OTHER FORMS OF PAYMENTS:Electronic Funds Transfer, E-money
- FINANCIAL INTERMEDIARIES:Indirect Finance, Financial and Economic Development
- FINANCIAL INSTRUMENTS & FINANCIAL MARKETS:Primarily Stores of Value
- FINANCIAL INSTITUTIONS:The structure of the financial industry
- TIME VALUE OF MONEY:Future Value, Present Value
- APPLICATION OF PRESENT VALUE CONCEPTS:Compound Annual Rates
- BOND PRICING & RISK:Valuing the Principal Payment, Risk
- MEASURING RISK:Variance, Standard Deviation, Value at Risk, Risk Aversion
- EVALUATING RISK:Deciding if a risk is worth taking, Sources of Risk
- BONDS & BONDS PRICING:Zero-Coupon Bonds, Fixed Payment Loans
- YIELD TO MATURIRY:Current Yield, Holding Period Returns
- SHIFTS IN EQUILIBRIUM IN THE BOND MARKET & RISK
- BONDS & SOURCES OF BOND RISK:Inflation Risk, Bond Ratings
- TAX EFFECT & TERM STRUCTURE OF INTEREST RATE:Expectations Hypothesis
- THE LIQUIDITY PREMIUM THEORY:Essential Characteristics of Common Stock
- VALUING STOCKS:Fundamental Value and the Dividend-Discount Model
- RISK AND VALUE OF STOCKS:The Theory of Efficient Markets
- ROLE OF FINANCIAL INTERMEDIARIES:Pooling Savings
- ROLE OF FINANCIAL INTERMEDIARIES (CONTINUED):Providing Liquidity
- BANKING:The Balance Sheet of Commercial Banks, Assets: Uses of Funds
- BALANCE SHEET OF COMMERCIAL BANKS:Bank Capital and Profitability
- BANK RISK:Liquidity Risk, Credit Risk, Interest-Rate Risk
- INTEREST RATE RISK:Trading Risk, Other Risks, The Globalization of Banking
- NON- DEPOSITORY INSTITUTIONS:Insurance Companies, Securities Firms
- SECURITIES FIRMS (Continued):Finance Companies, Banking Crisis
- THE GOVERNMENT SAFETY NET:Supervision and Examination
- THE GOVERNMENT'S BANK:The Bankers' Bank, Low, Stable Inflation
- LOW, STABLE INFLATION:High, Stable Real Growth
- MEETING THE CHALLENGE: CREATING A SUCCESSFUL CENTRAL BANK
- THE MONETARY BASE:Changing the Size and Composition of the Balance Sheet
- DEPOSIT CREATION IN A SINGLE BANK:Types of Reserves
- MONEY MULTIPLIER:The Quantity of Money (M) Depends on
- TARGET FEDERAL FUNDS RATE AND OPEN MARKET OPERATION
- WHY DO WE CARE ABOUT MONETARY AGGREGATES?The Facts about Velocity
- THE FACTS ABOUT VELOCITY:Money Growth + Velocity Growth = Inflation + Real Growth
- THE PORTFOLIO DEMAND FOR MONEY:Output and Inflation in the Long Run
- MONEY GROWTH, INFLATION, AND AGGREGATE DEMAND
- DERIVING THE MONETARY POLICY REACTION CURVE
- THE AGGREGATE DEMAND CURVE:Shifting the Aggregate Demand Curve
- THE AGGREGATE SUPPLY CURVE:Inflation Shocks
- EQUILIBRIUM AND THE DETERMINATION OF OUTPUT AND INFLATION
- SHIFTS IN POTENTIAL OUTPUT AND REAL BUSINESS CYCLE THEORY