If interest rates decline, which of the following securities is likely to have the greatest increase in market value?

When interest rates decline, the market value of existing bonds increases, and this effect is more pronounced for long-term bonds compared to short-term bonds. The reason behind this is rooted in the inverse relationship between interest rates and bond prices.

Long-term bonds lock in higher interest payments for a longer duration when interest rates fall. As the market adjusts to lower interest rates, the fixed coupon payments of these long-term bonds become more attractive compared to new bonds that are issued at the now-lower rates. This increased attractiveness results in a greater demand, consequently driving up the prices of long-term bonds significantly, more so than for short-term bonds.

Short-term bonds tend to experience less price appreciation because they mature more quickly and are less sensitive to interest rate changes. As a result, investors do not benefit as much from the declining rate environment when holding short-term securities.

Corporate stocks can also be affected indirectly by interest rate changes, but stock prices are influenced by a wide array of factors besides interest rates. Money market funds, on the other hand, primarily invest in short-term debt securities. While they may experience some increase in returns when rates drop, they do not hit the same level of appreciation in market value as long-term bonds.

Thus, in a declining interest