Chapter 5
The Behavior of Interest Rates
preview
Market equilibrium asset price
interest set
To see the forces affecting bond price,
then see interest rate behavior
Asset demand : demands for bonds and
money
Supply for these assets
ⅠDeterminants of Asset Demanded
Wealth—the total resources owned by the individual,
including all assets
Expected Return—the return expected over the next
period on one asset relative to alternative assets
Risk—the degree of uncertainty associated with the
return on one asset relative to alternative assets
Liquidity—the ease and speed with which an asset can
be turned into cash relative to alternative assets
Risk: 50% probability of 5%, 50%
probability of 15%;constant 10%
Liquidity: a bought car
Ⅱ Theory of Asset Demand
Holding all other factors constant:
1. The quantity demanded of an asset is positively
related to wealth
2. The quantity demanded of an asset is positively
related to its expected return relative to alternative
