Question

What will happen in the bond market if the government imposes a limit on the amount of daily transactions? Which characteristic of an asset would be affected?

Answer 1

In the bond market if the government imposes a limit on the amount of daily transactions, liquidity of bonds relative to other assets will​ decrease, increasing the interest rate and lowering​ bond's prices.

In the bond market various debt instruments are bought and sold by a variety of entities. In the bond market, corporations and governments issue bonds in order to raise debt capital to fund operations or seek growth opportunities.

If the government imposes a limit on the amount of daily transactions in the bond market, then bonds will become less liquid with respect to alternative assets, by also lowering​ bond's prices and increasing the interest rate.

Hence, bonds are issued by governments and corporations when they want to raise money.

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