Question

In this question, we are going to use the demand and supply model for bonds to understand more clearly what exactly is happening in the bond markets according to the following title of this Ws) article. U.S. Bond Issuance Nears $1 Trillion Companies Take Advantage of Low Interest Rates to Issue Bonds a) (20 points total: 10 points for correct and completely labeled diagram: 10 points for explanation. Draw two bond demand - bond supply diagrams with the US Government Security market on the left-hand side and the corporate bond market on the right-hand side. Begin at a point A in both diagrams and then model the topic of this article which of course is that corporations are issuing massive amounts of bonds (near $1 trillion to take advantage of low interest rates as point B(label the quantity of corporate bonds at point B as $1 trillion). Please explain exactly why 1) investors are willing to buy more corporate bonds as well as 2) why firms are willing to issue more corporate bonds.

Answer 1

Answer :-

Refer to the figures below :

Bond Rate of interest E A BD Bond demand Bonds Х

Figure (a) : U.S. government security market.

Band supply Bs' ין :j כיף כיף B Bond demand Bonds X

Figure (b) : Corporate bond market.

According to the article, it can be seen that in the Corporate bond market, rate of interest has fallen because of increase in the supply of bonds in Corporate bond market, which has shifted the bond's supply curve rightwards and new equilibrium occurs at point B, where rate of interest has fallen.

Investors are willing to buy more corporate bonds because profitability attached to it and firms wants to take advantage of lower interest rates. In government security market, demand for governments bonds has fallen.