The statement that "Bond prices vary inversely with changes in the market interest rate" means that if the
A) market interest rate increases the contractual interest rate will decrease.
B) contractual interest rate increases then bond prices will go down.
C) market interest rate decreases then bond prices will go up.
D) contractual interest rate increases the market interest rate will decrease.

Question

Quizplus · Accepted Answer

The statement means that when the market interest rate decreases, bond prices will go up because investors will be willing to pay more for a bond if it offers a higher interest rate than the current market rates. Conversely, if the market interest rate increases, bond prices will go down because investors can obtain higher returns on other investments and will be less willing to pay a premium for a bond. So, the option C is the correct answer. The statement is referring to the fact that as the market interest rate decreases, the demand for bonds increases, causing their prices to go up. Conversely, as the market interest rate increases, the demand for bonds decreases, causing their prices to go down. So, the correct answer is C.

The Statement That "Bond Prices Vary Inversely with Changes in the Market