Part 1What will happen in the bond market if the government imposes a limit on the amount of daily transactions? Which characteristic of an asset would be affected? A. Liquidity of bonds relative to other assets will decrease, increasing the interest rate and lowering bond's prices. B. Riskiness of bonds relative to other assets will increase, decreasing the interest rate and increasing bond's prices. C. Riskiness of bonds relative to other assets will decrease, increasing the interest rate and increasing bond's prices. D. Liquidity of bonds relative to other assets will increase, decreasing the interest rate and lowering bond's prices.

Question

Part 1What will happen in the bond market if the government imposes a limit on the amount of daily​ transactions? Which characteristic of an asset would be​ affected? A. Liquidity of bonds relative to other assets will​ decrease, increasing the interest rate and lowering​ bond's prices. B. Riskiness of bonds relative to other assets will​ increase, decreasing the interest rate and increasing​ bond's prices. C. Riskiness of bonds relative to other assets will​ decrease, increasing the interest rate and increasing​ bond's prices. D. Liquidity of bonds relative to other assets will​ increase, decreasing the interest rate and lowering​ bond's prices.

BlackTom AI · Accepted Answer

Let’s break down what happens when the government imposes a daily transaction limit in the bond market and identify which asset characteristic is affected.
Option A: 'Liquidity of bonds relative to other assets will decrease, increasing the interest rate and lowering bond's prices.' If daily trading is limited, bonds become harder to buy or sell quickly, i.e., liquidity falls. In financial markets, reduced liquidity typically leads to higher liquidity premia, which translates into higher required yields (interest rates) and thus lower prices for existing bonds. This option aligns with fundamental liquidity-risk-price relationships, so it describes a coherent chain of effects.
Option B: 'Riskiness of bonds relative to other assets will increase, decreasing the interest rate and increasing bond's prices.' While reduced liquidity can be associated with higher risk, the claim that interest rates would decrease is inconsistent with standard market dynamics: higher perceived risk generally pushes yields up (and prices down). Therefore this option misstates the direction of the price/yield response.
Option C: 'Riskiness of bonds relative to other assets will decrease, increasing the interest rate and increasing bond's prices.' Decreasing risk would normally lead to lower yields (not higher) and higher prices, but the option also claims both an increase in interest rates and prices, which is inconsistent in typical markets. The combination described is therefore internally contradictory and unlikely.
Option D: 'Liquidity of bonds relative to other assets will increase, decreasing the interest rate and lowering bond's prices.' Increasing liquidity would usually lower the required yield and raise prices, not lower them. The stated effect on prices conflicts with the typical positive relationship between liquidity and price, making this option incorrect.
In summary, Option A correctly links reduced liquidity from a daily transaction cap to higher interest rates and lower prices, while the other options misstate how risk, liquidity, yields, and prices would interact under a liquidity-constrained scenario.

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