Bond Market Exercise
Date Due: February 22, 2005
Instructions: Your paper must be typed. Typos and a generally poor presentation will be
penalized. Make two (2) copies of your paper. Hand written papers will not be accepted.
Read the Credit Markets column in the Wall Street Journal for two weeks, nine consecutive
days. Choose one or more of the articles to analyze, preferably ones that describe events that
affect both the demand for and supply of Treasury bonds. You must analyze four separate
events that cause either the demand or supply curve to shift. Do not analyze corporate or
municipal bonds. Attach copies of your article(s) to your homework assignment. Use the
following questions as a basis for your analysis.
1.
Carefully develop the bond market model discussed in your text and class. Develop does
not mean draw; it means explain the economic rationale behind the demand and supply
model. For example, be sure to explain why bond demand curves slope down and bond
supply curves slope up as well as what factors cause a movement along the respective
curves and what factors shift the curves? Also, explain what the significance of
equilibrium is and how the model moves from one equilibrium to another.
2.
Now, draw a graphical bond demand and bond supply model and do the following:
3.
(a)
Determine an initial equilibrium price, yield, and quantity of bonds demanded and
supplied.
(b)
Using the theory of asset demand, explain why each of the various factors
and events described in the articles your chose changed the demand for Treasury
bonds, the price of Treasury bonds and Treasury bond yields. Do not simply repeat
what the article says, connect your event to the asset theory of demand.
Demonstrate the impact of all the events described in the article on Treasury bond
price and yield. You may need to draw separate demand and supply models to
show all the events.
(c)
Most articles discuss bond demand; if, however, the articles you choose discuss
bond supply, explain why and how bond supply is changing. Explain any events
described in the articles that changed the supply of Treasury bonds, the price of
Treasury bonds and Treasury bond yields.
Discuss any trends you noticed in bond market trading during the two weeks. Why are bond
prices so volatile?