Money and Banking

SS 2021

Lecture Four: Bond Market

Dr. Hebatallah Ghoneim
 Lecture Content

•Market of Bond

❑ Demand of Bond

❑ Supply of Bond

❑ Price and interest rate

Lecture 4: ECON 605: SS2021: H.Ghoneim

 Learning Outcome
Understand Understand interest rates behavior

Analyze Analyze different factors that affect interest rates.

Evaluate Evaluate the return and risk of different financial assets.

Investigate Investigate investment decisions in financial markets

Advise Advise concerning financial instruments .

Evaluate Evaluate the influence of financial market impact on good market.

Lecture 4: ECON 605: SS2021: H.Ghoneim

 Bond Market
? Price ? Interest
Face
Value

Maturity
Date

Lecture 4: ECON 605: SS2021: H.Ghoneim

 Bond Market

Lecture 4: ECON 605: SS2021: H.Ghoneim

 Bond Market

• A buyer of bond pays a Price for the bond say 9000 to take it
in Future as 10000 for example. Thus after maturity time of
bond ends Saver received an interest payment =1000 which is
11.11% of the price he paid at first.

Lecture 4: ECON 605: SS2021: H.Ghoneim

 Price and Interest Rate

• Consider a zero coupon bond with a face value of $1000.

Suppose the bond has 1 year until maturity, and the expected
holding period is one year.

• Using the formula i = RETe = (F-P)/P, we can calculate the

expected return for various prices:
• As the P of bond ↑,
interest rate ↓.
• Hence expected rate of
return decrease.
•Incentive to buy bond
decrease .
•Quantity demanded
decrease. .
Lecture 4: ECON 605: SS2021: H.Ghoneim
 Demand of Bonds

• When a person demand a bond, he is willing to give a loan.

Demanding a bond = Supplying loanable funds

Negative relation -ve relation between P Positive relation

and i of bonds
between quantity between quantity of
demanded of bonds bonds (purchase of
bonds) and interest
and price of bond
on bond

Lecture 4: ECON 605: SS2021: H.Ghoneim

 Demand Curve of Bonds
i bonds
Pbonds 0
1000

Increase Decrease in
in price interest

100%
0
0 10 20 Qbonds
Decrease in
purchase of
bonds
Lecture 4: ECON 605: SS2021: H.Ghoneim
 Determinants of Asset Demand

Theory of Portfolio Choice Theory of Asset Demand

Lecture 4: ECON 605: SS2021: H.Ghoneim

Shifts in the Bond Demand Curve

Lecture 4: ECON 605: SS2021: H.Ghoneim

Factors that Shift Demand Curve for Bonds

Lecture 4: ECON 605: SS2021: H.Ghoneim

 Supply of Bonds

• Supply of bonds, means issuing or selling a bond, this assembles someone

who wants to take a loan or sell the bond.
Supply of Bonds = Demanding a loanable fund

-ve relation between P

and i of bonds Negative relation
Positive relation
between quantity between quantity of
supplied of bonds bonds (issued
bonds) and interest
and price of bond on bond

Lecture 4: ECON 605: SS2021: H.Ghoneim

 Shifts in the Bond Supply Curve

© 2005 Pearson Education Canada Inc. Lecture 4: ECON 605: SS2021: H.Ghoneim
Factors that Shift Supply Curve for Bonds

Lecture 4: ECON 605: SS2021: H.Ghoneim

 Changes in πe: Fisher Effect

If e 
1. Relative
RETe , Bd
shifts in to
left
2. Bs , Bs
shifts out to
right
3. P , i 

© 2005 Pearson Education Canada Inc. Lecture 4: ECON 605: SS2021: H.Ghoneim
Evidence on Fisher Effect

Lecture 4: ECON 605: SS2021: H.Ghoneim

Explaining Low Japanese Interest Rates

Lecture 4: ECON 605: SS2021: H.Ghoneim

 Business Cycle Expansion

1. Wealth , Bd
, Bd shifts
out to right
2. Investment
, Bs , Bs
shifts out to
right
3. If Bs shifts
more than
Bd then P ,
i

© 2005 Pearson Education Canada Inc. Lecture 4: ECON 605: SS2021: H.Ghoneim
Evidence on Business Cycles
and Interest Rates

Lecture 4: ECON 605: SS2021: H.Ghoneim

 Readings:
• Ch 5: The Behaviour of Interest Rates
(Starting of Chapter till Liquidity
Framework – 7th edition)

Lecture 4: ECON 605: SS2021: H.Ghoneim