Explain whether you would be more or less willing to buy long-term bonds in the

Question

Explain whether you would be more or less willing to buy long-term bonds in the following situations, holding all other things constant: (14 points)

aYour wealth falls.

bYou expect interest rates to rise.

cYou expect a bear market in stocks (stock prices are expected to decline).

dYou expect gold to appreciate in value.

ePrices in the stock market become more volatile.

fTrading in these bonds increases, making them easier to sell.

gBrokerage commissions on bonds fall.

Potential answer:

A More willing to buy

B Less willing to buy

Explanation / Answer

a) Solution: Less willing to buy

Explanation: Due to fall in my purchasing power I won’t have much money to buy long-term bonds

b) Solution: More willing to buy

Explanation: Expected return has increased thus would be more willing to buy

c) Solution: Less willing to buy

Explanation: Because it has become more riskier

d) Solution: Less willing to buy

Explanation: Gold are considered safer investment and always provides better returns. Now when expected return has decreased compared to gold thus I will be less willing to buy long-term bonds

e) Solution: More willing to buy

Explanation: As risks have reduced compared to stocks thus would prefer to buy it more

f) Solution: More willing to buy

Explanation: Since the process has become more simpler thus would be more willing.

g) Solution: More willing to buy

Explanation: Because it has become more liquid

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