When Reserve Bank actions cause interest rates on newly issued bonds to decrease from 6% to 5%, the prices of existing bondsGroup of answer choicesdecreaseincrease only if the coupon rate is greater than 6%.increasemay decrease or increasedecrease only if the coupon rate is less than 5%.
Question
When Reserve Bank actions cause interest rates on newly issued bonds to decrease from 6% to 5%, the prices of existing bondsGroup of answer choicesdecreaseincrease only if the coupon rate is greater than 6%.increasemay decrease or increasedecrease only if the coupon rate is less than 5%.
Solution
When interest rates decrease, the prices of existing bonds increase. This is because existing bonds that were issued when interest rates were higher become more attractive to investors, as they offer a higher return compared to newly issued bonds. Therefore, the demand for these existing bonds increases, which drives up their prices. So, the correct answer is "increase".
Similar Questions
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