Question

What is the correct answer on this question?

When interest rates decline, the price of a 30-year bond:

A

Increases

B

Decreases

C

Remains the same

D

Increases first, then decreases

E

Decreases first, then increases

Answer 1

When interest rates deccline, price of a 30-year bond increases. This is because as rate decrease, the bond looks attractive to the investors, more people will invest in it, this lead to increase in the price of bond.

Mathematically, we know that, interest rate comes in denominator while calculating price of a bond. So when interest rates decline, Price of the bond increases.

So, option A is correct.