When interest rate in the economy decreases , the price of existing bonds ____.2 pointsa) Increasesb) Fluctuatec) Decreasesd. Any of the above
Question
When interest rate in the economy decreases , the price of existing bonds ____.2 pointsa) Increasesb) Fluctuatec) Decreasesd. Any of the above
Solution
When interest rates in the economy decrease, the price of existing bonds typically increases.
Here's why:
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Bonds pay a fixed interest rate (also known as a coupon rate). When you buy a bond, you are essentially lending money to the issuer of the bond. In return, the issuer promises to pay you a certain rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due.
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When interest rates in the economy decrease, new bonds come to market paying lower interest rates than the existing bonds.
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As a result, those existing bonds with higher interest rates become more attractive to investors, which increases demand for these bonds.
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When demand for an asset increases, its price also increases. Therefore, when interest rates decrease, the price of existing bonds increases.
So, the correct answer is a) Increases.
Similar Questions
As the level of interest rates in the economy falls, the demand for money, other things being equal,a.Will fall more or less in line with the change in interest ratesb.Will remain unchangedc.Increased.Could move in either direction depending on other factors
Along the supply curve for bonds, an increase in the price of bondsa.decreases the interest rate and increases the quantity of bonds supplied.b.decreases the interest rate and decreases the quantity of bonds supplied.c.increases the interest rate and increases the quantity of bonds supplied.d.increases the interest rate and decreases the quantity of bonds supplied.
An increase in the interest rateA) increases the demand for money.B) increases the quantity of money demanded.C) decreases the demand for money.D) decreases the quantity of money demanded.
Considering all the other factors are constant, which of the following would be the result of a decrease in interest rates?An increase in investmentsA net capital inflowAn appreciation of the national currencyAn increase in consumption
If the expected return on bonds increases, all else equal, the demand for bonds increases,the price of bonds ________, and the interest rate ________.A) increases; decreasesB) increases; increasesC) decreases; decreasesD) decreases; increases
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