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.

c. 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

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