Interest rates share an ___________ relationship with bonds.a.inverseb.No relationshipc.Either inverse or directd.direct
Question
Interest rates share an ___________ relationship with bonds.a.inverseb.No relationshipc.Either inverse or directd.direct
Solution
The correct answer is a. inverse.
Here's why:
Interest rates and bond prices share an inverse relationship. When interest rates rise, bond prices fall. Conversely, when interest rates fall, bond prices rise.
This is because as interest rates increase, new bonds come to market paying higher interest rates than older bonds, making those older ones less attractive unless they can be purchased at a lower price. Hence, the price of older bonds falls.
On the other hand, when interest rates decrease, older bonds that pay higher interest rates become more attractive than new bonds
Similar Questions
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