Question

Bondholders may demand a higher rate of return when:

a) Interest rates in the economy are decreasing
b) The issuing company's credit rating improves
c) Market demand for bonds is low
d) Inflation expectations increase

Answer 1

Bondholders may demand a higher rate of return when inflation expectations increase, when market demand for bonds is low, or when overall interest rates in the economy rise. The correct option is d)

Step-by-step explanation:

Bondholders may demand a higher rate of return for a few reasons. One scenario is when inflation expectations increase, investors will seek a higher return to compensate for the decline in the purchasing power of their investment over time. Another instance is when the market demand for bonds is low, which typically forces issuers to offer a higher return to attract buyers. Finally, if interest rates in the economy rise, existing bonds with lower rates become less attractive, and new bonds must offer a higher rate to compete effectively in the marketplace.