Which of the following statements is correct?
A) Interest rates and bond prices vary directly.
B) Interest rates and bond prices vary inversely.
C) Interest rates and bond prices are unrelated.
D) Interest rates and bond prices vary directly during inﬂation and inversely during recessions.

Question

Quizplus · Accepted Answer

Interest rates and bond prices have an inverse relationship. When interest rates increase, bond prices decrease and vice versa. This is because when interest rates rise, the opportunity cost of holding a lower-yielding bond increases, making it less attractive to investors. Therefore, bond prices must decrease to increase the yield and become competitive with other investment options. Conversely, when interest rates decrease, bond prices increase as their yield becomes more attractive to investors.

Which of the Following Statements Is Correct