In the financial sector, there is an inverse relationship between market interest rates and bond prices. If the central bank increases the money supply, leading to a fall in the market interest rate, which of the following best describes the adjustment process in the bond market?
The demand for existing bonds decreases because their yields are now relatively lower, causing bond prices to fall.
The demand for existing bonds increases, causing their market prices to rise and their yields to fall until they align with the lower interest rate.
The coupon payments on existing bonds automatically decrease, keeping bond prices stable while lowering their yields.
The demand for money decreases as individuals sell bonds to hold cash, causing bond prices to rise and yields to rise.
