22. What is the inverse relationship between bond prices and interest rates? A)

Question

22. What is the inverse relationship between bond prices and interest rates?
A) When interest rates go up, bond prices increase; when interest rates go down, bond Prices increase.
B) When interest rates go down, bond prices fall; when interest rates go up, bond prices increase.
C) When interest rates go up, bond prices fall; when interest rates go down, bond prices increase.
D) There is no inverse relationship between bond prices and interest rates. 22. What is the inverse relationship between bond prices and interest rates?
A) When interest rates go up, bond prices increase; when interest rates go down, bond Prices increase.
B) When interest rates go down, bond prices fall; when interest rates go up, bond prices increase.
C) When interest rates go up, bond prices fall; when interest rates go down, bond prices increase.
D) There is no inverse relationship between bond prices and interest rates. 22. What is the inverse relationship between bond prices and interest rates?
A) When interest rates go up, bond prices increase; when interest rates go down, bond Prices increase.
B) When interest rates go down, bond prices fall; when interest rates go up, bond prices increase.
C) When interest rates go up, bond prices fall; when interest rates go down, bond prices increase.
D) There is no inverse relationship between bond prices and interest rates.

Explanation / Answer

Bond price is the present value of cash flows of the bonds. When the interest rate increases present value of the future cash flow decreases and hence the bond price also decreases.

Therefore when interest rate goes up the bond prices fall and when interest rate goes down the bond price increases.

Thus option (c) is correct.

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