Question

​If analysts expect that the demand for loanable funds will increase and the supply of loanable funds will decrease, they would most likely expect interest rates to ____ and prices of existing bonds to ____.

Answer 1

Answer:

Expectations:

• Interest rates to increase
• Prices of existing bonds to decrease

Explanation:

The price of loanable fund is the interest rates, so if the demand is expected to increase and the supply is expected to decrease as any other good, the price (interest rates) is expected to increase.

And if the interest rates are expected to increase, so does the discount rate used in the bond pricing formula, known as the bond's yield to maturity (YTM), so the bonds prices are expected to decrease.