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    Question

    Which of the following can be a reason for rising Bond

    Yield?  
    A Increase in interest rate Correct Answer Incorrect Answer
    B Decrease in bond prices Correct Answer Incorrect Answer
    C Both A & B Correct Answer Incorrect Answer
    D None of the above Correct Answer Incorrect Answer

    Solution

    Most bonds pay a fixed interest rate that becomes more attractive if interest rates fall, driving up demand and the price of the bond. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest rate paid by a bond, resulting in a decline in its price. When the cost of borrowing money rises (when interest rates rise), bond prices usually fall, and vice-versa. Further, Decrease in Bond prices causes the yield to increase.

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