If interest rates in general were to fall,
1. the prices of existing bonds would rise
2. the prices of existing bonds would fall
3. yields to maturity would rise
4. yields to maturity would fall
A)1 and 3
B)1 and 4
C)2 and 3
D)2 and 4

Question

Quizplus · Accepted Answer

When interest rates fall, the prices of existing bonds rise because they have higher interest rates compared to new bonds issued at the new lower rates. Consequently, yields to maturity on existing bonds fall, as yield moves inversely to bond price.

If Interest Rates in General Were to Fall