General Securities Representative (Series 7) Practice Exam

What happens to bonds when the US dollar is revalued?

1. Bonds drop in price

2. Bonds go up in price

3. There is no change in bond prices

4. Bonds become less attractive

The correct answer is: Bonds go up in price

When the US dollar is revalued, it means that the dollar has increased in value compared to other currencies. This valuation can lead to increased foreign investment in US bonds, as these investments become more lucrative when denominated in a stronger dollar. Foreign investors may find US bonds attractive due to the fact that they can potentially earn foreign currency that is worth more when exchanged back to their local currency. Additionally, a stronger dollar often signals a healthy economy, which can lead to lower interest rates. As interest rates decrease, the prices of existing bonds typically increase, since bond prices and interest rates have an inverse relationship. Investors seek to acquire existing bonds that pay higher rates than newly issued ones at lower rates, thereby driving up the prices of those bonds. Thus, the correct choice reflects the relationship between currency valuation and bond prices, highlighting that bonds generally go up in price when the US dollar is revalued.