Question

If interest rates​ rise, bonds become more attractive to​ investors, so bond prices will rise.​ Therefore, when interest rates​ rise, bond prices will also rise. The above statement​ is___________.

Answer 1

Answer:

The statement is false.

Explanation:

Bond prices and interest rates have an inverse relationship, as the interest on a bond rises its price will fall and vice versa.

For example if a bond has a face value of $80 and at maturity it pays $100, it means the interest rate is 20% and a $20 gain on the investment. At the high interest the investment is attractive, price of bonds is ($80) is low.

If however interest falls to 5% for the same bond. It will now have a face value of $95 (price rises) and a gain of $5 (interest falls).

So an inverse relationship exists between a bond's price and the interest rate.