Question

If interest rates in general were to fall, 1. the prices of existing bonds would rise 2. the prices of existing bonds would fall 3. yields to maturity would rise 4. yields to maturity would fall

Answer 1

Answer:

1. the prices of existing bonds would rise

Explanation:

General Interest rates and price of a bond are inversely related. The market interest rate also reflects an investors expected rate of return also referred to as yield to maturity i.e YTM.

Mathematically, price of a bond is the present value of it's future stream of coupon payments as well as principal repayments discounted at investors expected rate of return i.e YTM.

So, when market interest rates fall in general, this would lead to a rise in the price of bonds as general interest rates represent yield to maturity.