Bond prices- supply and demand?

Question

How does an increase in bond risk affect equilibrium bond price and quantity? Assume that investors are risk-averse.

I'm thinking demand would decrease, am I right? And does the Fisher effect come into play here? Would supply change also? If so, how (increase or decrease)?

Thanks a bunch!!

Answer 1

For risk averse investors, an increase in risk would make investors demand a higher return.

As for demand -- by definition, demand is equal to supply. If supply remains the same, then prices must decline so that demand will equal supply. The only way that prices could stay the same or go higher is if supply decreased. A decrease in the supply of bonds is not usually consistent with bonds becoming more risky.

Answer 2

to add to the last posting, whether demand decreases b/c of risk-aversion or investors demand higher interest rates b/c of increased risk doesn't matter - the effect is still the same, lower prices (increased supply-side pressures) and therefore higher rates (increased risk aversion) -

it's like asking which came first - the chicken or the egg, it doesn't matter b/c the result is the same

Answer 3

the fisher effect deals with changes in inflation and how it influences ppp and ex rate

increase bond risk will mean risk averse investors will switch to less risky assets so demand will fall

Answer 4

to characteristic to the final posting, no count if call for decreases b/c of possibility-aversion or investors call for larger expenses of activity b/c of better possibility would not count - the effect remains the comparable, decrease expenses (better furnish-facet pressures) and as a result larger expenses (better possibility aversion) - it quite is like asking which got here first - the rooster or the egg, it quite is not significant b/c the effect is the comparable