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An increase in y raises the demand for money, an increase in R reduces the demand for money, and an increase in w raises the demand for money. By the budget constraint (4), the demand for money sets the demand for bonds, bd = w?md = w?(10y?5R+.
Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price.
Explanation - The increase in the demand will lead to higher price but the interest rate tend to fall because the benefit will be received when the interest rate decrease and also this will affect the capital flow which will lead to falling in the exchange rate.
Meanwhile, falling interest rates cause bond yields to also fall, thereby increasing a bond's price. Credit risk also contributes to a bond's price. Bonds are rated by independent credit rating agencies such as Moody's, Standard & Poor's and Fitch to rank a bond's risk for default.
Changes in the demand for or supply of bonds When the demand for a particular bond increases, all else equal, its price will rise and its yield will fall.