Money, Banking, and International Financeprice of bonds decreases, so using the present value formula, the market interest rate rises.
Hence, the investors are attracted to the greater interest rate.
Figure 1. Demand function for bonds
Supply function shows the relationship between the quantity supplied and the market price,
when we hold all other economic variables constant. We drew a supply function in Figure 2.
Supply function has a positive slope because as you move from point A to point B, the price
becomes higher while the market interest rate falls. Consequently, businesses and firms borrow
more funds because the interest rates are cheaper. Remember a bond’s interest rate moves in the
opposite direction of a bond’s price.
Figure 2. Supply function for bonds