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 ratesσ
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. This, in turn, leads to a decrease in demand for the existing bonds, causing their prices to decline. As bond prices decline, the yield on these bonds increases, leading to an increase in interest rates. Therefore, the correct choice is E: prices would decline, and interest rates would rise.