Suppose the U.S.Treasury announces plans to issue $50 billion of new bonds.Assuming the announcement was not expected, what effect, other things held constant, would that have on bond prices and interest rates?
A) Prices and interest rates would both rise.
B) Prices would rise and interest rates would decline.
C) Prices and interest rates would both decline.
D) There would be no changes in either prices or interest rates.
E) Prices would decline and interest rates would rise.

Question

Quizplus · Accepted Answer

When the U.S. Treasury announces plans to issue new bonds, it increases the supply of bonds in the market. As a result, the demand for existing bonds decreases, which leads to a decline in their prices. Lower bond prices, in turn, lead to higher interest rates to attract investors. Therefore, the correct answer is E, which indicates that bond prices would decline and interest rates would rise.