Given below are two statements:
Statement I: Under competitive asset market conditions, the price of a bond equals its present value in equilibrium.
Statement II: If the price of a bond rises above its present value, the bond comes into excess demand.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Statement I is true but Statement II is false.
A bond priced above its present value is a poor buy, so people sell it. It comes into excess supply, not excess demand.
Statement I: Under competitive asset market conditions, the price of a bond equals its present value in equilibrium. — True. If the price is below the present value, buyers rush in and bid it up. If it is above, sellers push it down. It settles at the present value.
Statement II: If the price of a bond rises above its present value, the bond comes into excess demand. — False. Above its present value, the bond is less attractive than a savings bank account. People try to get rid of it, so there is excess supply and its price falls back.
NCERT (2026-27): “The Speculative Motive … Clearly the bond is more attractive than the savings bank account and people will rush to get hold of the bond. Competitive bidding will raise the price of the bond above its face value, till price of the bond is equal to its PV. If price rises above the PV the bond becomes less attractive compared to the savings bank account and people would like to get rid of it. The bond will be in excess supply and there will be downward pressure on the bond-price which will bring it back to the PV. It is clear that under competitive assets market condition the price of a bond must always be equal to its present value in equilibrium.” |