Kenneth R. Szulczyk
Figure 6. A demand function increases
Listing the six factors that increase the demand function: An increase in wealth increases the bond’s demand function shifting rightward. A growing
economy creates wealth. Thus, the demand for bonds increases too because investors and
the people have more wealth and invest more in the bond market. A decrease in the expected returns on investment increases the bond’s demand function
shifting rightward. If investors believe the interest rates will become lower, then investors
would buy more bonds now. For example, if you believe interest rates will fall,
subsequently, the bond prices would increase. Consequently, you buy bonds now because
you buy bonds for a cheap price at a high interest rate and could resell the bonds in the
future for a greater price as market interest rate falls. A decrease in expected inflation increases the bond’s demand function shifting rightward.
Inflation erodes the purchasing power of households, businesses, and governments.
Inflation also erodes the value of investments, such as stocks and bonds. Thus, the
investors would buy fewer bonds if they believe the inflation rate will rise in the future,
especially long-term bonds. If investors believe inflation would decrease in the future, then
investors buy more bonds for investment. A decrease in the risk of bonds increases the bond’s demand function shifting rightward.
Investors loan funds to borrowers, who will not default on their loans. Investors are usually
risk averse. If investors believe the bond market becomes more stable and “safer," then
they buy more bonds. An increase in the liquidity of the bond market increases the bond’s demand function
shifting rightward. Investors are attracted to highly liquid bonds. Future is uncertain, and