As interest rates fall,A) the values of bonds rise.B) the values of bonds fall.C) the values of bonds are unchanged.D) the value of perpetuities are unchanged, but the value of other bonds change in value.E) the value of all bonds except perpetuities change.

Question

As interest rates fall,A)  the values of bonds rise.B)  the values of bonds fall.C)  the values of bonds are unchanged.D)  the value of perpetuities are unchanged, but the value of other bonds change in value.E)  the value of all bonds except perpetuities change.

Leanna Howard · Accepted Answer

Final Answer : A, Explanation :  As interest rates fall, the return offered by existing bonds becomes relatively more attractive, leading to an increase in demand for those bonds and driving up their prices. This inverse relationship between interest rates and bond prices is known as bond price/yield relationship, and it applies to all types of bonds, including perpetuities. Therefore, the correct choice is (A) the values of bonds rise.

As interest rates fall,

A) the values of bonds rise.
B) the values of bonds fall.
C) the values of bonds are unchanged.
D) the value of perpetuities are unchanged, but the value of other bonds change in value.
E) the value of all bonds except perpetuities change.

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