Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
The bond prices will decrease because the new bonds will offer higher yields.
B
The bond prices will increase because investors will seek higher returns.
C
The bond prices will remain unchanged as they are fixed.
D
The bond prices will decrease because they will be less competitive against new bonds.
Understanding the Answer
Let's break down why this is correct
Answer
When a company issues bonds, their price can change based on interest rates. If interest rates go up, new bonds will be issued at these higher rates, making existing bonds with lower rates less attractive. This means that the price of the existing bonds will likely drop because investors want to sell them to buy the new, higher-paying bonds. For example, if a bond was trading at $1,200 because interest rates were low, and then rates increase, its price might fall to around $1,000 to match the new market conditions. Therefore, the most likely outcome for these bonds is a decrease in their price due to the rise in interest rates.
Detailed Explanation
When interest rates go up, new bonds pay more money to investors. Other options are incorrect because Some might think that higher interest rates mean more people want bonds; It's a common mistake to think that bond prices stay the same.
Key Concepts
Inverse relationship between interest rates and bond prices
Impact of monetary policy on financial markets
Bond valuation
Topic
Interest Rates and Bond Prices
Difficulty
medium level question
Cognitive Level
understand
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