When interest rate in the economy decreases , the price of existing bonds ____.2 pointsa) Increasesb) Fluctuatec) Decreasesd. Any of the above

When interest rates in the economy decrease, the price of existing bonds typically increases.

Here's why:

1. Bonds pay a fixed interest rate (also known as a coupon rate). When you buy a bond, you are essentially lending money to the issuer of the bond. In return, the issuer promises to pay you a certain rate of interest during the life of the bond and to repay the face value of the bond (the principal) when it matures, or comes due.

2. When interest rates in the economy decrease, new bonds come to market paying lower interest rates than the existing bonds.

3. As a result, those existing bonds with higher interest rates become more attractive to investors, which increases demand for these bonds.

4. When demand for an asset increases, its price also increases. Therefore, when interest rates decrease, the price of existing bonds increases.

So, the correct answer is a) Increases.