Consider the following statements:
(A) Bonds are papers issued by governments or firms for borrowing money from the public.
(B) A bond of face value Rs 100 that pays Rs 10 a year has a coupon rate of 10 per cent.
(C) A person who expects the rate of interest to rise also expects bond prices to rise.
(D) The price of a bond is inversely related to the market rate of interest.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → (A), (B) and (D) only
(A) Bonds are papers issued by governments or firms for borrowing money from the public. — Correct. Governments and firms issue bonds to borrow from the public.
(B) A bond of face value Rs 100 that pays Rs 10 a year has a coupon rate of 10 per cent. — Correct. Rs 10 on a face value of Rs 100 is a coupon rate of 10 per cent.
(C) A person who expects the rate of interest to rise also expects bond prices to rise. — Incorrect. A rise in the rate of interest makes bond prices fall.
(D) The price of a bond is inversely related to the market rate of interest. — Correct. When the rate of interest rises, the present value and so the price of a bond falls.
NCERT (2026-27): “The Speculative Motive … 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. Consider the following two-period bond. A firm wishes to raise a loan of Rs 100 from the public. It issues a bond that assures Rs 10 at the end of the first year and Rs 10 plus the principal of Rs 100 at the end of the second year. Such a bond is said to have a face value of Rs 100, a maturity period of two years and a coupon rate of 10 per cent. … It follows that the price of a bond is inversely related to the market rate of interest. … You expect interest rate to rise and consequently bond prices to fall.” |