How are Treasury bond prices affected when the interest rate falls?
A)The purchaser of the bond needs to spend less money to obtain a given number of dollars of interest per year, so the price of the bond must decrease.
B)The purchaser of the bond needs to spend more money to obtain a given number of dollars of interest per year, so the price of the bond must increase.
C)The purchaser of the bond needs to spend more money to obtain a given number of dollars of interest per year, so the price of the bond must decrease.
D)The purchaser of the bond needs to spend less money to obtain a given number of dollars of interest per year, so the price of the bond must increase.

Question

Quizplus · Accepted Answer

When interest rates fall, existing bonds with higher interest rates become more valuable because they pay more interest than new bonds issued at the new lower rates. Therefore, to obtain the same amount of interest income, investors are willing to pay more for the existing bonds, causing their prices to increase.

How Are Treasury Bond Prices Affected When the Interest Rate