Abstract: This chapter covers the demand side of the financial markets, with some example data from the USA. Three important factors driving demand are covered in detail in the three sections: the time value of money and expected returns, attitudes toward risk, and the possibility of reducing risk by holding a diversified portfolio of investments. A framework based on microeconomic theory is presented for analyzing why individuals and other investors are interested in the various types of financial instruments discussed in the previous chapter. This approach allows development of the links between demand and interest rates on bonds of different maturities or rates of return on financial instruments with different risk profiles. The willingness of an investor to hold a particular security is shown to depend on two sets of characteristics – those of the investor and those of the security.

Keywords: bonds, demand, economic theory, financial instruments, financial markets, interest rates, investment, investment portfolio, returns, risk, securities, USA,