When a bond becomes more attractive as an asset because of a rise in the interest rate:

Question

Quizplus · Accepted Answer

When the interest rate rises, the yield on bonds increases, making them more attractive as an asset. As a result, investors may sell their stocks and buy bonds, causing the price of stocks (a substitute asset) to fall. Therefore, option B is the correct choice. The price of bonds may also fall in the future if interest rates continue to rise, but this is not necessarily an immediate effect. Option A is incorrect because the price of stocks is unlikely to rise in this scenario. Option D is also incorrect because investors are more likely to buy bonds rather than other assets when interest rates rise.

When a Bond Becomes More Attractive as an Asset Because