If the preferred habitat theory is correct, a reduction by the Treasury in the supply of 30-year bonds should
A)lower their price and increase their yield.
B)increase their price and lower their yield.
C)lower both their price and their yield.
D)increase both their price and their yield.

Question

Quizplus · Accepted Answer

According to the preferred habitat theory, investors have a preference for bonds of certain maturities. If the Treasury reduces the supply of 30-year bonds, it means there are fewer long-term bonds available for investors who prefer or require them. This increased demand for the now scarcer 30-year bonds would lead to an increase in their price. Since bond prices and yields move in opposite directions, an increase in the price of these bonds would result in a decrease in their yield.

If the Preferred Habitat Theory Is Correct, a Reduction by the Treasury