If real estate prices are expected to fall, the demand for bonds ________ and interest rates ________:

Question

BlackTom AI · Accepted Answer

Because investors will reallocate away from an asset expected to lose value, demand shifts toward safer alternatives such as bonds. Relevant concepts: portfolio substitution (investors move wealth toward relatively more attractive assets), the inverse relationship between bond prices and interest rates (yields): as bond demand raises prices, yields fall.

Step-by-step reasoning:
1. Expectation change: If real estate prices are expected to fall, the expected return on holding real estate declines and perceived risk rises. Investors who would have held real estate seek other assets.
2. Portfolio response: Many investors shift funds into alternative assets with more stable returns—commonly bonds (especially government or high-quality corporate bonds).
3. Effect on bond market: This increased demand for bonds raises the market price of existing bonds (more buyers competing for the same supply).
4. Price–yield relationship: Bond yield (interest rate) is inversely related to price. For a fixed coupon payment, yield = coupon payment / bond price. Higher price → lower yield (market interest rate).

Numeric illustration (intermediate steps):
- Suppose a bond pays $50 annually (coupon) and initially trades at $1,000: yield = 50 / 1,000 = 0.05 = 5%.
- Increased demand pushes price to $1,050: new yield = 50 / 1,050 ≈ 0.0476 = 4.76%.
- Thus demand increased and interest rate (yield) fell.

Why the correct answer is correct:
- Increased demand for bonds and lower interest rates follow directly from the portfolio shift and the inverse price–yield relation.

Why the other choices are incorrect:
- (a) “decreases; falls”: demand would not decrease if investors flee real estate.
- (c) “decreases; rises”: same incorrect first part; plus a falling demand would raise rates, but demand actually rises.
- (d) “increases; rises”: demand increases but that drives rates down, not up.

Therefore the correct choice is b. increases; falls.

If real estate prices are expected to fall, the demand for bonds and interest rates :单项选择题

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If real estate prices are expected to fall, the demand for bonds ________ and interest rates ________:单项选择题