Money and Banking: Factors affecting bond demand and supply, Fischer effect, loanable funds and liquidity preference frameworks

MONEY AND BANKING
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Question 1
The expected return on the bond for the given cases is computed as shown below.
Question 2
The requisite computation is as shown below.
Question 3
The factors that are responsible for shift in the demand curve of bonds are as follows
(Damodaran, 127-129)
 Wealth change leading to changes in availability of capital for investment
 Inflation rate decrease leading to increase in the bond price and hence resulting in
higher demand
 Expected interest rate decline leading to increase in the bond price thus increasing
demand
 Changing risk associated with bonds
 Changing liquidity of bond thus altering the liquidity premium associated with the
bond