Question
Which of the following best describes the relationship
between bond prices and interest rates?Solution
The relationship between bond prices and interest rates is often described as being inverse and linear, meaning that as interest rates rise, bond prices will fall, and vice versa. This relationship exists because when interest rates rise, newly issued bonds will offer higher yields, making them more attractive to investors than older bonds with lower yields. To attract buyers, the older bonds must be sold at a discount, reducing their price.
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