Question

To what extent do you agree or disagree with the following statement on a scale of 1 to 5 where 1 = strongly disagree and 5 = strongly agree. Please explain your answer.

"As interest rates increase, bond prices decrease."

Answer 1

5

Strongly agree. Lets take an example lets say there is Bond which has a coupon of 6% and market Interest Rate is also 6% Couple of weeks later, lets say that the interest rate in the market rises. Since in the market, other investments are paying more interest than 6% then this Bond will not be attractive anymore because by investing the same money , more can be earned. This phenomenon makes the prices fo down. This is pure economics, When supply is more than the demand, the prices falls because the Bonds are not attractive anymore, supply will increase and demand will decrease. making the price falls.

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