Question

As the price of a bond ________ and the expected return ________, bonds become more attractive to investors and the quantity demanded rises.

Answer 1

The price of a bond Falls and the expected return Rises, bonds become more attractive to investors and the quantity demanded rises.

Let's now think about how bonds are impacted by interest rates. Interest rate and credit spread make up the majority of a bond's yield. The interest rate is the base rate for all bonds denominated in a particular currency and compensates investors for their fundamental economic risks, whereas credit spread indicates the idiosyncratic risks related to specific issuers.

Therefore, if the market anticipates an increase in interest rates, bond yields will also increase, which will cause bond prices to decline.

The price of a bond Falls and the expected return Rises, bonds become more attractive to investors and the quantity demanded rises.

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