Why is speculative demand for money inversely related to the rate of interest?
Relationship between speculative demand for money and rate of interest. Speculative demand for money is inversely related to rate of interest, i.e., higher the rate of interest, smaller will be speculative demand for money and vice versa as proved above. Therefore, curve of speculative demand for money is downward sloping to right as shown in the following Fig. (a). There are two situations:
(i) If market rate of interest is very high and everyone expects it to fail in future (i.e., rise in price of bond) thereby anticipating capital gain from bond-holding, people will convert their money into bonds. Thus speculative demand for money is low. In Fig. (a) at very high rate of interest, say 15%, people convert their entire money holding into bonds indicating speculative demand for money to be zero. (Remember, rise in bond price means gain to the bond-holder —similar to gain of a property dealer when price of property rises. Such a gain occurring from rising price of bond is called Capital Gain.).
(ii) On the contrary, if rate of interest is low and people expect it to rise in future (i.e., fall in price of bond) anticipating capital loss from bond-holding, people convert their bonds into money in order to avoid future capital loss. They hold up money balance thinking that income from non-monetary assets like bond will be low and so the cost of money holding will also be low. Thus speculative demand for money becomes very high so much so that when rate of interest declines to minimum, say 3% as shown in Fig.(a), speculative demand for money becomes infinite (perfectly elastic). This pushes the economy into liquidity trap and the speculative demand curve becomes flat as shown in (a).
Total demand for money (Md) consists of transaction demand (including precautionary demand) for money 
as a function of income and speculative (or asset) demand for money 
as a function of rate of interest. Symbolically:
