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Question

Bond prices in the market decrease when the banks offer higher interest rates because-

A It shows loss of trust in the economy, hence people start removing their money from bond markets Correct Answer Incorrect Answer
B Yield curve in the long run fluctuates because of the volatility induced due to higher interest rates Correct Answer Incorrect Answer
C It would give comparatively lesser returns than what can be earned through bank rates Correct Answer Incorrect Answer
D It would reduce the coupon rate on the bond which results in declining returns Correct Answer Incorrect Answer

Solution

• Bonds are investment securities where an investor lends money to a company or a government for a set period of time, in exchange for regular interest payments. • Bonds prices in the market decrease when the bank interest rate rises. Usually, when bank interest rates rise, investors deposit their money in banks. This is mainly because investors will receive a higher return with the same amount of money that was earlier invested in bonds. It will also decrease the demand for bonds in the market, further reducing bond prices. And the inverse will happen if the bank interest rates reduce, it leads to increase in the price of bonds, because investors will demand more bonds to invest in, speculating higher returns than what they would otherwise receive through banks.

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