הקשר בין מחיר האג"ח לתשואה

The relationship between bond price and yield

• As the price of the bond increases, the yield decreases (we earn less).
• As the price of the bond decreases, the yield increases (we earn more).
• Remember that the amount we are supposed to receive at the maturity date of the bond is always known in advance.

The interest rate in the economy

• For the purpose of the explanation below, let's assume that the yield that can be obtained on government bonds due in one year represents the interest rate in the economy.
• If the yield is 4%, then the interest rate in the economy is said to be 4%.
• If the yield is 10%, then the interest rate in the economy is said to be 10%.
• The interest rate represents the price of holding money. Whoever holds a means of payment pays the interest.

Acceptable symbols

• M1: Means of Payment
• i: The interest rate in the economy
• D_m: The demand curve for money
• S_m: The supply curve for money
• B: The money base

Demand for money – clarification

• The term "demand for money" can be confusing. It seems obvious that each of us will always want more money and therefore the demand for money may be infinite.
• But in fact, the question is not how much money we want to receive, but how much of what we receive we would like to hold in the form of a means of payment (= available money) and how much we would like to invest in assets that yield a return or in goods and services.
• The demand for money means the desire to own money as an asset.
• Every $1 diverted from cash to current deposits increases the amount of current deposits in the country according to the multiplier of the deposits.
• Any cash deposited by the public in the banks allows the banks to increase the amount of loans (which are immediately registered as deposits) several times, in accordance with the necessary reserve ratio, determined by the central bank.
• If, for example, the deposit multiplier is 5, then transferring $1 from cash to current deposits will increase the means of payment by $4 (current deposits will increase by $5 and cash will decrease by $1).
• Of course, transferring $1 from current deposits to cash will decrease the means of payment by $4 (current deposits will decrease by $5 and cash will increase by $4).

The axes of the demand and supply curves in the money market

• The x-axis – the amount of money (M₁).
• The y-axis – the interest rate (i).

The demand curve for money (Chart 1)

• The demand curve for money is based on 2 components:
  1. Public demand which is the dominant element.
  2. Banks' demand for cash for reserve purposes.
• Symbol of the curve: D_m
• The direction of the curve: descends from left to right (negative slope).
• And the explanation: the higher the interest rate, the more the public wants to hold less money in favor of investment avenues that provide interest.