Assume That All Interest Rates in the Economy Decline from 10

question 79

Multiple Choice

Assume that all interest rates in the economy decline from 10% to 9%. Which of the following bonds would have the largest percentage increase in price?

• A) a 1-year bond with a 15% coupon.
• B) a 3-year bond with a 10% coupon.
• C) a 10-year zero coupon bond.
• D) a 10-year bond with a 10% coupon.
• E) an 8-year bond with a 9% coupon.

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Definitions:

Money Demand Curve

A graphical representation showing the relationship between the quantity of money people want to hold and the interest rate.

Fed

The central banking system in the United States, known as the Federal Reserve System, is tasked with overseeing monetary policy.

Government Bonds

Securities issued by a government to raise funds from the public, promising to pay back with interest at a future date.

Excess Supply

A situation where the quantity of a good or service that is available surpasses the quantity demanded at a current price, often leading to a price decrease.