Financial Markets and Institutions

Ninth Edition, Global Edition

Chapter 4
Appendix 3 Loanable Funds
Framework

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Figure 4.1 Supply and Demand for Bonds (from earlier in
the chapter)

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Supply/Demand (1 of 2)
• Problem with this framework – interest rates are indirectly
determined from equilibrium bond prices.
• Want a framework where rates are the point – on the x-
axis.

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Figure 1 A Comparison of Terminology: Loanable Funds and
Supply and Demand for Bonds

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Supply/Demand (2 of 2)
• A bit odd – demand and supply are sloping the wrong
direction.
• Just rename axes!
– X-axis: Quantity of Bonds or Loanable Funds
– Y-axis: Interest rate
• Two methods are equivalent, both locking at
demand/supply in terms of stocks (amounts).

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