Suppose investors decided to sell their holdings of capital stock in order to purchase outstanding bonds payable and as a result,the prices of bonds payable increased.What would be the likely impact on market interest rates?

Question

Quizplus · Accepted Answer

The demand for bonds payable has increased due to investors selling their holdings of capital stock, which has driven up the prices of bonds payable. As a result, interest rates will fall since there is a inverse relationship between bond prices and interest rates. When the bond prices rise, the yield on those bonds fall as the numerator (coupon payment) remains the same but the denominator (bond price) increases. Therefore, when the bond prices increase, the interest rates may fall.

Suppose Investors Decided to Sell Their Holdings of Capital Stock