Question

What effect will a lower price of bonds have on interest rates? multiple choice

a. it could either raise or lower interest rates.
b. there is no connection between the price of bonds and interest rates.
c. it will raise interest rates.
d. it will lower interest rates.

Answer 1

A lower price of bonds generally raises interest rates.

Step-by-step explanation:

A lower price of bonds will generally raise interest rates. When the price of bonds decreases, the yield or interest rate on those bonds increases. This is because investors demand a higher yield to compensate for the lower price they paid for the bonds.

For example, if the price of a bond decreases from $1,000 to $900, and the coupon payment remains the same, the yield on the bond will increase.

This higher yield is attractive to investors, and they may be willing to sell existing bonds with lower yields to invest in the higher-yielding bonds, increasing the demand for the higher-yielding bonds and driving up interest rates.

Therefore, a lower price of bonds typically leads to an increase in interest rates.