ECON 2035 Chapter : Ch 5 Outline
Document Summary
Wealth: holding everything else constant, an increase in wealth raises the quantity demanded of an asset. Its expected return is 10: (= . 5 x 15% + . 5 x 5%) An alternative asset, holding all else constant: raises the quantity demanded of the asset. Supply and demand in the bond market: each bond price is associated w/ a particular level of the interest rate, latin. Demand curve: ex:1 year discount bonds, no coupon payments, pay owner ,000 fv in 1 year, if held for a year, return is knowns absolutely. Is equal to the interest rate as measured by the yield to maturity: i = r^e = (f-p)/(p) Int rate and expected returns are (1000 900) / (900: = . 111, = 11. 1, since expected returns an cheaper bond is higher, the quantity demanded of bonds will be higher, as predicted by portfolio theory.
