[amp_mcq option1=”reduction in income” option2=”increment in income” option3=”matured income” option4=”frequent income” correct=”option1″]
The correct answer is A. reduction in income.
When interest rates fall, the value of existing bonds goes up. This is because investors are willing to pay more for a bond that offers a higher interest rate than the current market rate. As a result, bondholders who sell their bonds before they mature will receive a higher price than they would have if interest rates had been higher.
However, bondholders who hold their bonds until they mature will receive a lower interest rate than they would have if interest rates had been higher. This is because the interest rate that is paid on a bond is fixed at the time the bond is issued. So, if interest rates fall after a bond is issued, the bondholder will receive a lower interest rate than they could have earned by investing in a new bond.
In conclusion, falling interest rates lead to a reduction in bondholder income because the value of existing bonds goes up and the interest rate paid on new bonds goes down.
Here is a brief explanation of each option:
- Option A: Reduction in income. When interest rates fall, the value of existing bonds goes up. This is because investors are willing to pay more for a bond that offers a higher interest rate than the current market rate. As a result, bondholders who sell their bonds before they mature will receive a higher price than they would have if interest rates had been higher. However, bondholders who hold their bonds until they mature will receive a lower interest rate than they would have if interest rates had been higher. This is because the interest rate that is paid on a bond is fixed at the time the bond is issued. So, if interest rates fall after a bond is issued, the bondholder will receive a lower interest rate than they could have earned by investing in a new bond.
- Option B: Increment in income. This is not the correct answer because falling interest rates lead to a reduction in bondholder income.
- Option C: Matured income. This is not the correct answer because matured income is the income that is received when a bond matures. Falling interest rates do not affect the amount of income that is received when a bond matures.
- Option D: Frequent income. This is not the correct answer because falling interest rates do not affect the frequency of income that is received from a bond. Bonds typically pay interest semi-annually, regardless of the level of interest rates.