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Homework answers / question archive / If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks _____ and the demand for long-term bonds _____
If fluctuations in interest rates become smaller, then, other things equal, the demand for stocks _____ and the demand for long-term bonds _____.
A. decreases, increases
B. increases, increases
C. increases, decreases
D. decreases, decreases
Answer: A
One of the risk of holding long-term bonds is that the interest rate and inflation move against your investment and reduce its value. For example, assume you buy a bond at 4% but then interest rates rise to 6%. Your bond is now worth less. Thus, the more stable interest rates are, the more attractive long-term bonds. Since bonds and stocks are substitutes, the more bonds become attractive, the less demand for stocks will be.
