General Securities Representative (Series 7) Practice Exam

What is a potential effect on yields if the US dollar is revalued?

1. Yields go down

2. Yields go up

3. Yields remain the same

4. Yields become unpredictable

The correct answer is: Yields go down

When the U.S. dollar is revalued, it typically means that the dollar has increased in value relative to other currencies. This revaluation can lead to a variety of economic effects, but one common consequence is a decline in yields, particularly for domestic bonds. As the dollar appreciates, imports become cheaper while exports may decline in competitiveness due to higher prices in foreign markets. This situation can lead to decreased inflationary pressures as import prices fall. Low inflation generally results in lower interest rates because investors will demand less compensation for the reduced risk of inflation eating into their returns. Consequently, bond yields, which are influenced by interest rates, tend to go down. Additionally, if foreign investors find U.S. assets attractive due to the stronger dollar, they might increase their demand for U.S. bonds. This heightened demand can push bond prices up, and since yields and prices move in opposite directions, yields would consequently decrease. Thus, a revaluation of the U.S. dollar creates conditions that often lead to a reduction in yields, making the choice stating that yields go down the correct one.