They are number of factors that are likely to changes during robust economic times. Wealth, default risk and general business condition. Wealth is a measure the value of all assets of worth owned by a company, person or country (Arnold, 2008). Wealth of the general citizenry will increase during robust economic growth. Economic growth increases the amount of goods and services produced within an economy. Therefore, people will have increased incomes, low unemployment and the generally productivity will increases (Greenwood & Vayanos, 2012). Robust economic growth leads to healthy economy resulting to higher living standards for individuals. In addition, business becomes more profitable leading more employment opportunities. Consequently, during robust economic times improvement in living standards of individual will increase the wealth of individuals in the country.
Another factor that changes during robust economic time is the default risk. Default risk refers to an event where an individual or an organization is unable to make payments in order to meet ones debt obligations. Therefore, in such as case one defaults on his or her debt obligations. During robust the general business condition is good. Therefore, businesses are able to generate high profits which are important to meet ones debt obligations. On the other hand, an individual has more employments opportunities and enjoys high incomes. Thus, is able to meet his or her future debt obligations. The default risk in this case is reduced in such a robust economy.
Lastly, the general business in also affected during robust economic times. During such times the business climate is good for businesses due to number of factors (Becker & Ivashina, 2011). Business can easily access credit easily due to the fact the banks and financial institution are more willing to lend. Second, more business opportunities and investment can be harnessed and quickly generate profits for businesses (O'Sullivan et al, 2003). Lastly, the growth incomes within the economy will have a direct impact of the profitability of the business due to increase disposable income within the economy. Therefore, it can be said that the general business climate is increased during robust economic times.
Discuss the implications for bond demand/supply, bond price, and yield
The law of demand that states that “the higher the price of bond lowers the demand of bond” (Arnold, 2008). The demand curve shows an inverse relation between the bond price and direct relationship exists between the interest and quantity of demand.
In addition, the law of supply states that “the higher the price of bond the higher the quantity of supply bond” (Arnold, 2008). The supply curve shows a positive relationship between the price and quantity of supply bond. However; there exists an inverse relationship between interest and quantity of supply bond.
Bond prices tend to decrease during periods of high economic growth. What does this reveal about which of these factors is important?
During robust economic times bond prices tend to decrease. Inflation levels are usually high therefore; Central Banks increase the interest rates in order to tame the inflation levels. Therefore, the interest rates are kept high (Eason & Yla, 1983). The price of bond moves in the opposite direction of interest rate. Therefore, the price an investor pays for bonds tends to decrease as the interest rate rises. Therefore, during robust economic bond prices tend to decrease.