Sia
Question
Statistics
Posted 5 months ago
What happens to the price and interest rate of a bond if the demand for that bond increases?
Choose 1 answer:
(A) Price decreases; interest rate decreases.
(B) Price increases; interest rate increases.
(C) Price is unaffected; interest rate is unaffected.
D Price increases; interest rate decreases.
(E) Price increases; interest rate is unaffected.
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Answer from Sia
Posted 5 months ago
Solution by Steps
step 1
Understand the basic relationship between bond price and interest rate: When the demand for a bond increases, the price of the bond goes up
step 2
Recognize the inverse relationship between bond price and interest rate: As the price of a bond increases, its yield (or interest rate) decreases. This is because the bond's fixed interest payments become a smaller percentage of the higher price
step 3
Apply the relationship to the given scenario: If the demand for the bond increases, the price will increase, and the interest rate will decrease
Answer
D
Key Concept
Inverse relationship between bond price and interest rate
Explanation
When demand for a bond increases, its price goes up, and due to the fixed interest payments, the yield (interest rate) goes down
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