Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Decrease in nominal interest rates
B
Existing bonds with higher returns become more attractive
C
Demand for existing bonds increases
D
Bond prices rise due to increased demand
Understanding the Answer
Let's break down why this is correct
Answer
When interest rates decrease, existing bonds become more attractive to investors because they usually pay a fixed interest rate that is higher than new bonds issued at the lower rates. As more people want these existing bonds, their prices go up. This increase in bond prices can lead to a rise in the overall value of the financial market, as bonds are a significant part of it. For example, if a bond pays 5% interest but new bonds only pay 3%, investors will pay more for the 5% bond, raising its price. Therefore, a decrease in interest rates leads to higher bond prices, which can positively influence the financial market.
Detailed Explanation
When interest rates go down, new bonds pay less. Other options are incorrect because This option suggests that existing bonds are attractive right away; This option implies demand increases immediately.
Key Concepts
Interest Rates
Bond Prices
Financial Markets
Topic
Interest Rates and Bond Prices
Difficulty
easy level question
Cognitive Level
understand
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