When the interest rate on newly-issued bonds decreases,the price of existing bonds

Question

Quizplus · Accepted Answer

As the interest rate on newly-issued bonds decreases, the demand for existing bonds with higher coupon rates increases, which drives up the price of the existing bonds. This is because investors are willing to pay a premium for bonds that pay higher interest rates than the newly-issued bonds that offer lower rates. Thus, option A is the correct choice as the price of existing bonds increases when the interest rate on newly-issued bonds decreases.

When the Interest Rate on Newly-Issued Bonds Decreases,the Price of Existing