So from my past studies i know that if the interest rate is expected to decrease, then the expected return will increase and the demand for long term bonds shifts to the right.
If investors believe that interest rates will decrease in the future, then investors will buy more bonds now. If you believe interest rates will fall, then bond prices will increase. You will buy bonds now, because you will be buying bonds for a cheaper price (high IR) and resell bonds in the future for a higher price, when market IR decrease.
As a conclusion , if IR decrease in the future, it will make people expect higher return on long term bonds today , since there is more risk. There is a negative relationship between IRs and and expected returns.
Then why , all of a sudden , my text book says :
'If the possibility of a default increases because a corporation begins to suffer large losses, the default risk on corporate bonds will increase, and the expected return on these bonds will decrease'.
SO now all of a sudden expected return decreases when there is more default risk ? Shouldn't expected return increase when there is more default risk?
What am i missing?