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Ch.1 · Comparing Financial Products · medium

Which of the following is the CORRECT relationship between bond prices and interest rates?

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EXPLANATION

Bond prices and interest rates have an inverse relationship. When interest rates rise, existing bonds with lower coupons become less attractive, so their prices fall. When rates fall, existing bonds become more valuable, so prices rise.

A.Bond prices and interest rates move in the same direction

B.Bond prices move inversely to interest rates [✓ Correct]

C.Bond prices are unaffected by changes in interest rates

D.Bond prices rise when inflation increases

EXPLANATION

Bond prices and interest rates have an inverse relationship. When interest rates rise, existing bonds with lower coupons become less attractive, so their prices fall. When rates fall, existing bonds become more valuable, so prices rise.

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