Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Interest rates and bond prices move in the same direction
B
Interest rates and bond prices are independent of each other
C
Interest rates and bond prices have an inverse relationship
D
Interest rates do not affect bond prices
Understanding the Answer
Let's break down why this is correct
Answer
Interest rates and bond prices have an inverse relationship, meaning when one goes up, the other goes down. This happens because bonds pay a fixed interest, or coupon rate, to investors. If interest rates rise, new bonds are issued with higher rates, making existing bonds with lower rates less attractive. For example, if you have a bond that pays 3% interest and new bonds are available at 5%, people would rather buy the new ones, so the price of your bond would decrease to make it more appealing. This relationship is important for investors to understand because it affects the value of their bond investments over time.
Detailed Explanation
When interest rates go up, bond prices go down. Other options are incorrect because Some might think that both go up together; This suggests that interest rates and bond prices don't affect each other.
Key Concepts
inverse relationship
Topic
Interest Rates and Bond Prices
Difficulty
easy level question
Cognitive Level
understand
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