An decrease in interest rates generated by the FED buying bonds will, ceteris paribus, ___________ bond prices..

Social Studies

1 answer:

Bumek [7]4 years ago

7 0

Answer:

An decrease in interest rates generated by the FED buying bonds will, ceteris paribus, _increase __________ bond prices..

Explanation:

There is inverse relation between bond price and interest rate .

Bond price , sums up the present cash value of cash flow of bond. The cash flow is discounted by the prevailing interest rate . If it goes down , the NPV of cash flow increases . Hence the bond price increases.

Second theory is that , when prevailing interest rate decreases , demand of bond on which interest rate is fixed goes up . Hence its price increases.

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