Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Bond prices increase as existing bonds with higher rates become more attractive.
B
Bond prices decrease because new bonds are issued at lower rates, making existing bonds less desirable.
C
Bond prices remain stable since interest rates have no effect on bond valuations.
D
Bond prices fluctuate randomly without any relation to interest rates.
Understanding the Answer
Let's break down why this is correct
Answer
When a central bank lowers interest rates, it usually makes borrowing cheaper for businesses and individuals. This can lead to more spending and investment, which helps stimulate the economy. In the bond market, lower interest rates mean that new bonds will be issued with lower coupon rates, or interest payments. As a result, existing bonds with higher interest rates become more attractive to investors, which increases their prices. For example, if a new bond pays 3% interest because of the lower rates, but an existing bond pays 5%, investors will prefer the older bond, driving its price up.
Detailed Explanation
When interest rates go down, new bonds pay less. Other options are incorrect because This answer suggests that lower rates make older bonds less appealing; This answer thinks interest rates don't matter for bond prices.
Key Concepts
Interest Rates
Bond Prices
Monetary Policy
Topic
Interest Rates and Bond Prices
Difficulty
medium level question
Cognitive Level
understand
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