Money and Banking

Chapter5 4. Explain why you would be more or less willing to buy long-term AT&T bonds under the following circumstances: a. Trading in these bonds increases, making them easier to sell. More, because if it is easier to sell bond this means that liquidity of bonds increase. b. You expect a bear market in stocks(stock prices are expected to decline) More because these bonds’s expected return will increase compared to stocks. . Brokerage commission on stocks fall Less because the decrease in brokerage commissions on stocks makes them more liquid. d. You expect interest rates to rise Less because when interest rates increase the expected return decreases. e. Brokerage commission on bonds fall. More because the decrease in brokerage commissions on bonds makes bond more liquid. 7. Using both the liquidity preference framework and the supply and demand for bonds framework, show shy interest rates are procyclical If the economy is growing there is a business cycle expansion witch will result to a increase in supply of bonds this means that the supply curve will shift to the right if this happens there will be a new equilibrium point and if everything is constant the new equilibrium point will be lower witch means that price of a bond will decrease and the interest rate will increase. If the economy grows the first effect we can see Is that the income will increase. When income increases the demand for money will increase shifting the demand curve to the right if every thing else is constant this will mean that the equilibrium point will change thus moving up and showing an increase in interest rate. 9. Find the â€Å"Credit Markets† column in the Wall Street Journal. Underline the statement in the column that explain bond price movements, and draw the appropriate supply and demand diagrams that support these statement. The column describes how the price of treasury bonds rose when the stock market faltered. The higher relative expected returns on bonds would then cause the quantity demanded to rise each price, shifting the demand curve to the right. The outcome is a rise in the equilibrium price and a fall in interest rates. Massive amount of supply of bonds is set to enter the market over the next month. The increase in supply would shift the supply curve to the right, causing the equilibrium price to fall.