Question

Several years ago the Golden Company issued bonds to raise funds so that it could buy equipment. Those bonds were purchased by the Bank of Westeros. However, now the Bank of Westeros has decided that it doesn't want to have any assets in the form of bonds, so it is selling off all the bonds that it owns. Which of the following is most likely to be the result of this action?

A The face value of the bonds will decrease.
B The default risk of the bonds will increase.
C The opportunity cost of holding money will decrease.
D Interest rates will increase.
E Bond prices will increase.

Answer 1

The result of the Bank of Westeros selling off the bonds it owns is that bond prices will increase.

When the Bank of Westeros sells off the bonds it owns, the most likely result is that Bond prices will increase. When a bond is sold in the market, its price is determined by supply and demand. As the Bank of Westeros sells off its bonds, the supply of bonds in the market decreases, leading to an increase in demand and therefore an increase in bond prices.

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