Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Prices will increase as they offer higher returns
B
Prices will decrease due to lower demand
C
Prices will remain unchanged regardless of rates
D
Prices will become unpredictable
Understanding the Answer
Let's break down why this is correct
Answer
When interest rates decrease, the prices of existing bonds tend to increase. This happens because new bonds are issued at lower interest rates, making the older bonds with higher rates more attractive to investors. For example, if you have a bond that pays 5% interest and new bonds are only paying 3%, people will want to buy your bond because it offers a better return. As more people want to buy your bond, the price goes up. Therefore, when interest rates drop, existing bonds become more valuable.
Detailed Explanation
When interest rates go down, existing bonds with higher rates become more valuable. Other options are incorrect because Some might think lower rates mean less interest in bonds; It's a common mistake to think bond prices don't change with rates.
Key Concepts
Interest Rates
Bond Prices
Monetary Policy
Topic
Interest Rates and Bond Prices
Difficulty
easy level question
Cognitive Level
understand
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