What is the difference between quantity supplied of bonds an

What is the difference between quantity supplied of bonds and a supply of bonds? First, use your own words to describe this difference and then illustrate the difference using two separate, properly labeled graphs (keep in mind that each of them will be a bond market). Give a factor that causes the quantity supplied and supply to change and explain which direction the quantity supplied and supply will change if there is an increase in this factor.

Solution

Bond is an instrument like common stock. It is issued by corporates/government to borrow. Thevolume of borrowings depeds upon price. Here price of a bond indicates money paid by its purchaser or money recived by its user. If price is high, then by issuing a bond more money can be collected. So supplier/borrower of bond will issue more bond. Here price of a bond depends upon two factors. They are-

1. Coupon rate: It is the interest that issuer of bond will pay to its buyer at a fixed periodic interval.

2. Market yield: It is the average interest rate offered by the similar types of bonds in the market.

If coupon rate of the bond is higher than market yield, then price of bond will be high. Suppose a bond of $100 is paying a coupon rate of 8% while the market yield is 5%. As coupon rate is high, the price of bond should be well above its face value of $100.

Thus bond supply is directly related with its price. It is inversly related with yield. Low yield implies high price and so high supply.

Now consider the difference between quatity suplied of bond and a supply of bond. Quantity supplied of bond is the quantity of bond that sellers are willing to sale at a given price/yield. On the other hand supply of bond indicates entire functional relation between bond price and quantity supplied.

If you draw a diagram of bond supply curve, then the curve will indicate supply of bonds at different prices. If you consider a specific point on the supply curve, then it will indicate quantity supplied of bond. In the diagram below a`point say \'X\' indicates quantity supplied of bonds while the curve showing different quantities at different prices as a whole is the indicator of supply of bond.

------------------------------------------------------------------------------------------------------------------------------------------

Their are different factors that may cause supply curve to change its direction. One such factor is change in the expected profit of business. If the business expects that its profit will rise significantly in near future, then it will invest more. For this reason it is now ready to borrow more at a given price. So more bonds will be issued. With the rise in suuply of bonds, the supply curve will shift to the right. So quantity supplied of bonds at a given price will be more now.