How do interest rates generally affect bond prices?

How do interest rates generally affect bond prices?

• A. As interest rates rise, bond prices rise
• B. As interest rates rise, bond prices fall
• C. As interest rates remain stable, bond prices fluctuate
• D. Interest rates do not affect bond prices

Answer: (B)

The inverse relationship between interest rates and bond prices is a fundamental concept in fixed-income investing. When interest rates rise, newly issued bonds come to the market offering higher yields compared to existing bonds. This makes existing bonds, which carry lower yields, less attractive to investors. As a result, the prices of these existing bonds decrease in order to provide a comparable yield and remain competitive. Conversely, when interest rates fall, existing bonds with higher yields become more desirable, leading to an increase in their prices. This dynamic is crucial for investors to understand, as it directly impacts the performance of their bond investments. Knowing this relationship helps in making informed decisions regarding bond purchases and monitoring market conditions.

The inverse relationship between interest rates and bond prices is a fundamental concept in fixed-income investing. When interest rates rise, newly issued bonds come to the market offering higher yields compared to existing bonds. This makes existing bonds, which carry lower yields, less attractive to investors. As a result, the prices of these existing bonds decrease in order to provide a comparable yield and remain competitive.

Conversely, when interest rates fall, existing bonds with higher yields become more desirable, leading to an increase in their prices. This dynamic is crucial for investors to understand, as it directly impacts the performance of their bond investments. Knowing this relationship helps in making informed decisions regarding bond purchases and monitoring market conditions.