Answered: Explain what happens to the bond price…

Explain what happens to the bond price and interest rate and why. Expected inflation increases The return on bonds rises relative to other assets The federal government deficit increases i) ii) iii)

Financial Reporting, Financial Statement Analysis and Valuation

8th Edition

ISBN:9781285190907

Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Publisher:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw

Chapter6: Accounting Quality

Section: Chapter Questions

Problem 4QE

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Concept explainers

Loanable Funds Theory

The loanable funds theory is a neoclassical theory that determines the interest rate where the demand for loanable investments and supply of loanable funds intersect. To determine the interest rate, this theory employs linear regression and a demand curve. At the equilibrium point, demand for borrowings and demand for the issuance of borrowing funds are inextricably linked. This point of equilibrium should equalize demand and the supply of money available for borrowing.

Question

1.Explain what happens to the bond price and interest rate and why.
Expected inflation increases
The return on bonds rises relative to other assets
The federal government deficit increases
i)
ii)

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