A bond is a financial asset that promises to make one or more payments at specified dates in the future
The present value (PV) of any asset refers to the value now of the future payments that the asset offers
Where $R_k$ is the k-th payment
<aside> 💡 An increase in the market interest rate leads to a fall in the price of any given bond. A decrease in the market interest rate leads to an increase in the price of any given bond.
</aside>
The present value of a bond is the most someone would be willing to pay now to own the bond’s future stream of payments
<aside> 💡 An increase in the riskiness of any bond leads to a decline in its expected present value and thus to a decline in the bond’s price. The lower bond price implies a higher bond yield.
</aside>
The Determinants of Money Demand
- The Interest Rate
The cost of holding money is the income that could have been earned if that wealth were instead held in the form of interest-earning bonds (the opportunity cost!)
<aside> 💡 Other things being equal, the demand for money is assumed to be negatively related to the interest rate
</aside>
- Real GDP
<aside> 💡 The demand for money is assumed to be positively related to real GDP (for any given interest rate). When real GDP increases, the $M_D$ curve shifts to the right.
</aside>
- The Price Level
As P rises, households and firms will need to hold more money in order to carry out an unchanged real value of transactions