Question 1

When the demand for bonds ________ or the supply of bonds ________, interest rates rise.
A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; increases

Accepted Answer

When the demand for bonds decreases, it means fewer people want to buy them, so sellers might have to lower the price, which effectively raises the interest rate (since bond prices and yields move inversely). Conversely, when the supply of bonds increases, there are more bonds available than people want to buy, which can also lead to lower prices and thus higher interest rates.

Question 2

Diversification benefits an investor by
A)increasing wealth.
B)increasing expected return.
C)reducing risk.
D)increasing liquidity.

Accepted Answer

Diversification helps to reduce risk by investing in a variety of different assets or securities. This can lower the potential impact of any one investment on the overall portfolio and help to smooth out returns over time. While diversification may not necessarily increase wealth or expected return, it can help to protect wealth by minimizing losses during market downturns. Diversification may also not necessarily increase liquidity, as some investments may have limited liquidity regardless of diversification.

Question 3

When the demand for bonds ________ or the supply of bonds ________, bond prices fall.
A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; increases

Accepted Answer

The demand for bonds and the supply of bonds have an inverse relationship with bond prices. So, when the demand for bonds decreases or the supply of bonds increases, bond prices fall. Choice A and B are incorrect as they imply that bond prices would rise in those scenarios.

Question 4

When the price of a bond is ________ the equilibrium price, there is an excess supply of bonds and the price will ________.
A)above; rise
B)above; fall
C)below; fall
D)below; rise

Accepted Answer

The answer of When the price of a bond is...

Question 5

As the price of a bond ________ and the expected return ________, bonds become more attractive to investors and the quantity demanded rises.
A)falls; rises
B)falls; falls
C)rises; rises
D)rises; falls

Accepted Answer

As the price of a bond falls, the yield or expected return rises. This makes bonds more attractive to investors as they can earn higher returns. As a result, the quantity demanded of bonds also rises.

Question 6

Factors that determine the demand for an asset include changes in the
A)wealth of investors.
B)liquidity of bonds relative to alternative assets.
C)expected returns on bonds relative to alternative assets.
D)risk of bonds relative to alternative assets.
E)all of the above.

Accepted Answer

All of the factors listed can affect the demand for an asset. An increase in wealth may lead to an increase in demand for certain assets, such as luxury goods or higher-yielding investments. The relative liquidity, returns, and risk of an asset can also all influence an investor's demand for it, as they will weigh the potential benefits and drawbacks of investing in that asset compared to others.

Question 7

In a recession when income and wealth are falling, the demand for bonds ________ and the demand curve shifts to the ________.
A)falls; right
B)falls; left
C)rises; right
D)rises; left

Accepted Answer

In a recession, people tend to save more money and reduce their spending, including their investments. This results in a decrease in the demand for bonds, shifting the demand curve to the left. Therefore, choice B, which suggests a fall in demand and a leftward shift in the demand curve, is the best option.

Question 8

During business cycle expansions when income and wealth are rising, the demand for bonds ________ and the demand curve shifts to the ________.
A)falls; right
B)falls; left
C)rises; right
D)rises; left

Accepted Answer

During business cycle expansions, when income and wealth are rising, people have more money to invest, which increases the demand for bonds. This increased demand shifts the demand curve to the right.

Question 9

When the interest rate on a bond is below the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________.
A)demand; rise
B)demand; fall
C)supply; fall
D)supply; rise

Accepted Answer

The answer of When the interest rate on a bond...

Question 10

When the demand for bonds ________ or the supply of bonds ________, interest rates fall.
A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; increases

Accepted Answer

When the demand for bonds increases, it means more people want to buy them, which typically leads to higher bond prices and lower yields (interest rates). Conversely, when the supply of bonds decreases, there are fewer bonds available for purchase, which can also lead to higher prices and lower yields due to the scarcity of available bonds.

Question 11

When the price of a bond is ________ the equilibrium price, there is an excess demand for bonds and the price will ________.
A)above; rise
B)above; fall
C)below; fall
D)below; rise

Accepted Answer

When the price of a bond is below the equilibrium price, there is an excess demand for bonds, which puts upward pressure on the price, causing it to rise.

Question 12

When the interest rate on a bond is above the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________.
A)demand; rise
B)demand; fall
C)supply; fall
D)supply; rise

Accepted Answer

The answer of When the interest rate on a bond...

Question 13

When the demand for bonds ________ or the supply of bonds ________, bond prices rise.
A)increases; decreases
B)decreases; increases
C)decreases; decreases
D)increases; increases

Accepted Answer

When the demand for bonds increases, meaning there are more buyers than available bonds, bond prices will rise. Alternatively, when the supply of bonds decreases, meaning there are fewer bonds available for sale, bond prices will also rise.

Question 14

The demand for an asset rises if ________ falls.
A)risk relative to other assets
B)expected return relative to other assets
C)liquidity relative to other assets
D)wealth

Accepted Answer

The answer of The demand for an asset rises if...

Question 15

When the interest rate on a bond is ________ the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________.
A)below; demand; rise
B)below; demand; fall
C)below; supply; rise
D)above; supply; fall

Accepted Answer

The answer of When the interest rate on a bond...

Question 16

When the interest rate on a bond is ________ the equilibrium interest rate, there is excess ________ in the bond market and the interest rate will ________.
A)above; demand; fall
B)above; demand; rise
C)below; supply; fall
D)above; supply; rise

Accepted Answer

When the interest rate on a bond is above the equilibrium interest rate, it means that the bond is offering a higher return than what the market is willing to pay. As a result, there will be excess supply (not demand) in the bond market because sellers will be willing to offer more bonds at the higher interest rate, but buyers will not be willing to buy at that price. To clear the market, sellers will have to lower the price (i.e. increase the interest rate) until there are enough buyers to take up the excess supply. Therefore, the interest rate will fall.

Question 17

When the price of a bond is above the equilibrium price, there is excess ________ in the bond market and the price will ________.
A)demand; rise
B)demand; fall
C)supply; fall
D)supply; rise

Accepted Answer

When the price of a bond is above the equilibrium price, there is excess supply in the bond market, and the price will fall to reach equilibrium.

Question 18

The higher the standard deviation of returns on an asset, the ________ the asset's ________.
A)greater; risk
B)smaller; risk
C)greater; expected return
D)smaller; expected return

Accepted Answer

Standard deviation measures the amount of variability or dispersion in returns. A higher standard deviation means there is a greater range of possible returns, which implies greater risk. Therefore, the correct choice is A) greater risk.

Question 19

The supply curve for bonds has the usual upward slope, indicating that as the price ________, ceteris paribus, the ________ increases.
A)falls; supply
B)falls; quantity supplied
C)rises; supply
D)rises; quantity supplied

Accepted Answer

The supply curve for bonds, like most goods, slopes upwards, indicating that as the price rises, the quantity supplied (not the supply itself) increases, holding other factors constant.

Question 20

When the price of a bond is below the equilibrium price, there is excess ________ in the bond market and the price will ________.
A)demand; rise
B)demand; fall
C)supply; fall
D)supply; rise

Accepted Answer

When the price of a bond is below the equilibrium price, there is excess demand because more people want to buy the bond at its lower price than there are bonds available. This excess demand causes the price of the bond to rise as sellers can command higher prices due to the high demand.

Quiz 4: Why Do Interest Rates Change

When the demand for bonds or the supply of bonds , interest rates rise.

Diversification benefits an investor by

When the demand for bonds or the supply of bonds , bond prices fall.

When the price of a bond is the equilibrium price, there is an excess supply of bonds and the price will .

As the price of a bond and the expected return , bonds become more attractive to investors and the quantity demanded rises.

Factors that determine the demand for an asset include changes in the

In a recession when income and wealth are falling, the demand for bonds and the demand curve shifts to the .

During business cycle expansions when income and wealth are rising, the demand for bonds and the demand curve shifts to the .

When the interest rate on a bond is below the equilibrium interest rate, there is excess in the bond market and the interest rate will .

When the demand for bonds or the supply of bonds , interest rates fall.

When the price of a bond is the equilibrium price, there is an excess demand for bonds and the price will .

When the interest rate on a bond is above the equilibrium interest rate, there is excess in the bond market and the interest rate will .

When the demand for bonds or the supply of bonds , bond prices rise.

The demand for an asset rises if ________ falls.

When the interest rate on a bond is the equilibrium interest rate, there is excess in the bond market and the interest rate will .

When the interest rate on a bond is the equilibrium interest rate, there is excess in the bond market and the interest rate will .

When the price of a bond is above the equilibrium price, there is excess in the bond market and the price will .

The higher the standard deviation of returns on an asset, the the asset's .

The supply curve for bonds has the usual upward slope, indicating that as the price , ceteris paribus, the increases.

When the price of a bond is below the equilibrium price, there is excess in the bond market and the price will .