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Hi
I don’t have understand this statement:
“The demand for money will be high when interest rates are low. This is because the speculative demand for money will be high when interest rates are low”
I don’t get the second half.
If interest rates are low, then share and bond prices will be high.
If people think interest rates will rise in the future then it means that share and bond prices will fall in the future and so by holding shares and bonds they would end up making a capital loss.
So they will want their money in cash rather than in shares or bonds, so more demand for cash.
Hey, I’m currently doing FFM. I don’t understand what you meant by if interest rates will rise in future, that means that share prices and bond prices will fall. Is it because the demand will fall and hence price decrease?
The prices of shares and of bonds depend on the dividends/interest that the investors expect to receive, and the return that they require. The return they require depends on current interest rates.
If shareholders expect a dividend of 10c a year and want a 10% return, then they will be prepared to pay $1 (because 10c is 10% return on $1).
If interest rates go up and they then want a 20% return, then they will only be prepared to pay $0.50 (because 10c is a 20% return on $0.50).
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