MGT411 Money & Banking Assignment 01 Fall 2020 Solution / Discussion

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MGT411 Assignment Solution fall 2020


 2:Expected Inflation             A decline in expected inflation becomes more attractive investment opportunity for bonds with   fixed nominal  payments. Bonds demand shift to right side ,interest rates reduces and bond prices increases.

 Factors that have incremental effects on Demand of bonds :               1:Wealth                                 An increase in wealth means increase in demand for bonds and others assets as well.Consequently bond curve shits to upward and shows increase in bond prices and decline in interest rates. Bonds demand shift to right side,interest rates reduces and bond prices increases .

: 4:Expected in future interest Rates                                 A  decrease in expected in future interest  Rates turns investment in bonds more attractive, and resultantly bond demand curves shifts on right side,bond prices increases and interest  rates fall.

: 5:Riskiness of the bond         If the Riskiness of the bond decreases when comparing with other available alternatives makes bonds more attractive ,thus,bonds curve shift on the right side,bond prices increases and interest rates fall.

 3:Expected Return                Upword moment in expected return on the bond comparatively to the expected return on alternatives makes bonds more desirable investment option .Bond demands shift to right side ,interest  rates reduces and bond.

: 1 Fluctuation in expected inflation

              Bonds issuers have concern about real cost of borrowing,therefore,signaling about the rise of the inflation shows the indication that falls is real cost will push the supply upward or outward as they result of desiring more borrowings.

2 Changes in government borrowings

                  Increase in government expenditure reflects in the need of more borrowings that resultantly increasibg they quantity og bonds outstanding and at last shift the supply curve outward(right).

3 Fluctuations in business conditions

                 At the start of the boom, business-cycle is in expension phase-that is availablety of more investment opportunities that creats need for borrowings on large scale, ultimately increase in supply push the suplly curve outside(right)




Question No. 1                                                                                                             (5 marks)


Briefly explain the factors that have incremental effect on both supply and demand of bonds?



Question No. 2                                                                                                             (5 marks)


Which of the following 1 year bonds (Face value = Rs. 1000) has the highest yield to maturity and WHY?

  1. 7 % coupon bond selling for Rs. 850
  2. 8 % coupon bond selling for Rs. 1000
  3. 9 % coupon bond selling for Rs. 1150


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