Which of the following statements about bonds is NOT correct?

Answer & explanation

Correct answer: option 1

The correct answer is Option (1) → The price of a bond is directly related to the market rate of interest.

When the market rate of interest rises, the present value of a bond’s returns falls, so its price falls. Bond price and interest move in opposite directions.

Option (1) The price of a bond is directly related to the market rate of interest. — False. The relation is inverse, not direct.

Option (2) Bonds are tradable in the market. — True. Bonds can be bought and sold.

Option (3) Bonds are issued by governments or firms for borrowing money from the public. — True. This is why bonds are issued.

Option (4) Bonds are papers bearing the promise of a future stream of monetary returns. — True. This is what a bond is.

NCERT (2026-27): “The Speculative Motive … For simplicity, let us club all forms of assets other than money together into a single category called ‘bonds’. Typically, bonds are papers bearing the promise of a future stream of monetary returns over a certain period of time. These papers are issued by governments or firms for borrowing money from the public and they are tradable in the market. … It follows that the price of a bond is inversely related to the market rate of interest. Different people have different expectations regarding the future movements in the market rate of interest based on their private information regarding the economy. If you think that the market rate of interest should eventually settle down to 8 per cent per annum, then you may consider the current rate of 5 per cent too low to be sustainable over time. You expect interest rate to rise and consequently bond prices to fall. …”