A bondholder thinks that the present market rate of interest of 5 per cent is too low to last. Arrange the following in the order in which they take place:
(A) She sells her bonds and holds money instead.
(B) She expects bond prices to fall.
(C) She expects the market rate of interest to rise.
(D) She fears a capital loss on her bonds.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → (C), (B), (D), (A)
This is the chain behind the speculative demand for money.
(C) She expects the market rate of interest to rise. — A rate she thinks is too low is expected to go up.
(B) She expects bond prices to fall. — The price of a bond is inversely related to the rate of interest.
(D) She fears a capital loss on her bonds. — A fall in bond prices lowers the value of what she holds.
(A) She sells her bonds and holds money instead. — Holding money avoids the capital loss.
NCERT (2026-27): “The Speculative Motive … 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. If you are a bond holder a decrease in bond price means a loss to you – similar to a loss you would suffer if the value of a property held by you suddenly depreciates in the market. Such a loss occurring from a falling bond price is called a capital loss to the bond holder. Under such circumstances, you will try to sell your bond and hold money instead.” |