Consider the following statements 1 The price of a bond is inversely related to the market rate of i...........

Economic Affairs Financial Markets

Download Solution PDF

Consider the following statements.

1.The price of a bond is inversely related to the market rate of interest.

2.The market rate of interest is very high during a liquidity trap.

Which of the statements given above is/are correct?

1 only

2 only

Both 1 and 2

Neither 1 nor 2

छोटे Courses बड़े Results

Master Financial Markets

Prepare through Micro-courses

Try Now

Explanation:

1 only

The price of a bond is inversely related to the market rate of interest. When market interest rates rise, the prices of existing bonds tend to fall, and vice versa.

The statement about the market rate of interest being very high during a liquidity trap is not correct. In a liquidity trap, interest rates are generally low, and monetary policy may be ineffective in stimulating economic activity.