Question

When overall interest rates fall (to 2%), the bond you already own (with 5% coupon rate) becomes _______ valuable to potential buyers, so its price will ________.

Answer 1

When overall interest rates fall (to 2%), the bond you already own (with 5% coupon rate) becomes more valuable to potential buyers, so its price will rise.

What is the relationship between interest rate and bond prices?

A bond is a debt instrument used by companies, individuals and the government to raise capital for its activities. Bondholders earn interest on their investments at predetermined regular intervals. When the bond matures, the bondholders would receive the amount that was invested.

There is an inverse relationship between the price of a bond and the interest rate. When interest rate rises, the price of bonds would fall. Conversely, when interest rate falls, the price of bonds will rise.

The reason for this inverse relationship is that when interest rate rises, the cost of borrowing becomes higher. This discourages people from buying bonds. As a result, the demand for bonds would fall and this would lead to a fall in the price of bonds. On the other hand, if interest rate falls, it becomes cheaper to borrow, the demand for bonds would rise and this would lead to an increase in the price of bonds.

To learn more about bonds, please check: brainly.com/question/15282698

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