Financial Market and Institutions (Assignment ) Assignment

Financial Market and Institutions ( ) - Assignment Example Liquidity: Fast and flexible liquidity of the asset market enhances demand for the assets. Conversely, increased liquidity of the alternative asset markets (like the stock market) lowers the demand for bonds. Wealth is the factor that impact on the total asset demand and that influence investors to demand one asset over another. Equilibrium interest rate is determined when the money supply and the interest are balanced. The interest rate moves towards equilibrium when the temporarily above or below the below or above the rate of equilibrium because of excess or extreme supply, which in turn rises the interest rate. The transparent analysis of the Fisher effects is that if the expected inflation rises by 5% and above, the expected return on interest rate falls as a result of fall in the demand for the bond. Fisher effects occur because when expected inflation increases or rises, the nominal interest rates rise in return (Mishkin and Eakins 140). The rise in expected inflation is a transparent proves that the real cost of borrowing or lending has declined, causing increase in the quantity of bonds supplied. Equilibrium bonds with fall in demand and increase in supply. The decreased riskiness of bonds increases the demand for bonds. The demand curve shifts to the right and the equilibrium bond price rises and the interest rate falls. Higher federal government deficits increase the supply of bonds Expected Profitability of Investment Opportunities; in a business cycle expansion, the supply bond falls when there are fewer expected profitable investment opportunities. Expected Inflation; supply of bond increase when there is an increase in expected inflation. Government Activities; higher federal government deficits increase the supply of bonds, conversely, government surpluses reduces the supply of bonds. Liquidity premium theory elaborates all the facts of the term