Tutorial 12

Name___________________________________

1. 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; falls
D) rises; rises

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

3. 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; rise
D) supply; fall

4. 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) supply; fall
C) demand; fall
D) supply; rise

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

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

7. 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) supply; fall
B) demand; fall
C) supply; rise
D) demand; rise
 8. 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) supply; fall
B) supply; rise
C) demand; fall
D) demand; rise

9. 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; supply; rise
C) below; supply; fall
D) above; demand; rise

10. 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; supply; rise
B) below; demand; rise
C) below; demand; fall
D) above; supply; fall

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

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

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

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

15. Factors that determine the demand for an asset include changes in the
A) liquidity of bonds relative to alternative assets.
B) risk of bonds relative to alternative assets.
C) expected returns on bonds relative to alternative assets.
D) all of the above.
16. The demand for an asset rises if ________ falls.
A) expected return relative to other assets
B) wealth
C) liquidity relative to other assets
D) risk relative to other assets

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

18. Diversification benefits an investor by

A) increasing liquidity.
B) increasing expected return.
C) reducing risk.
D) increasing wealth.

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

20. Higher expected interest rates in the future ________ the demand for long-term bonds and shift the demand
curve to the ________.
A) increase; left
B) increase; right
C) decrease; right
D) decrease; left

21. Lower expected interest rates in the future ________ the demand for long-term bonds and shift the demand
curve to the ________
A) increase; left.
B) increase; right.
C) decrease; right.
D) decrease; left.

22. When people begin to expect a large stock market decline, the demand curve for bonds shifts to the ________
and the interest rate ________.
A) right; falls
B) left; falls
C) left; rises
D) right; rises

23. When people begin to expect a large run up in stock prices, the demand curve for bonds shifts to the
________ and the interest rate ________.
A) left; falls
B) right; rises
C) left; rises
D) right; falls
24. An increase in the expected rate of inflation will ________ the expected return on bonds relative to that on
________ assets, and shift the ________ curve to the left.
A) reduce; financial; demand
B) raise; real; supply
C) reduce; real; demand
D) raise; financial; supply

25. When the expected inflation rate increases, the demand for bonds ________, the supply of bonds ________,
and the interest rate ________.
A) decreases; increases; rises
B) decreases; decreases; falls
C) increases; increases; rises
D) increases; decreases; falls

26. When bond prices become more volatile, the demand for bonds ________ and the interest rate ________.
A) decreases; falls
B) increases; rises
C) decreases; rises
D) increases; falls
 Structured Questions

1. Identify and explain the four factors that influence asset demand. Which of these factors affect total asset
demand and which influence investors to demand one asset over another?

2. How is the equilibrium interest rate determined in the bond market? Explain why the interest rate will move
toward equilibrium if it is temporarily above or below the equilibrium rate.

3. Identify and describe three factors that cause the supply curve for bonds to shift.

4 What is the difference between credit risk and interest-rate risk?

5 What is duration gap analysis and why is it important to a bank?