Bonds

Question 1

what are bonds

Answer 1

type of security that is sold by firms/governments-way for them to borrow money at a certain interest—when buying it investors get a certain interest rate which is bought by pension funds

Question 2

relationships with interest rates

Answer 2

ncrease in interest rates-existing bonds less attractive—less value-fall in demand for bonds price of bonds fall-NEGATIVE WEALTH EFFECT

Fall in interest rates-existing bonds more attractive-paying an interest rate above equilibrum—increase in value —increase demand for bonds —price of bonds increase —increase psoitive wealth effect

Question 3

example of a relationship with I.R

Answer 3

market interest rate is 5% gov agree to pay an interest rate of 5% on £100b ond return is £50 a year Increase in interest rates above bond offers bad value for money because it only pays 5£ a year another would pay £10 a year

Question 4

application on bonds

Answer 4

UK gov budget £875bn worth of bonds in 2024£72800 bn purchase on gilt payments

Question 5

coupon

Answer 5

an interest payment to bondholder between the date of issue and the date of maturity

Question 6

maturity of a bond

Answer 6

period of time for which the asset is outsiding -when it finished had been repaid, it has mature

Question 7

factors affecting bond prices

Answer 7

Fall in economic growth due to liquidity trap —Increase in Qiuantitative easing—BOE creates money— Boe by bonds—increase demand for bonds—higher prices

Fall in budget deficit —gov sells more bonds—increase supply of bonds —fall in price of bonds

Increase in interest rates —increase RFS—increase saving—less demand for bonds —price fallls

Increase infation —Increase Irs—refer to chain above