When bond prices rise, the interest rates fall. This is because there is an inverse relationship between bond prices and interest rates. When the prices of bonds increase, the yields on those bonds decrease. Therefore, interest rates fall, which in turn makes borrowing cheaper and encourages investment.

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If Bond Prices Rise

Question 35

Multiple Choice

If bond prices rise,

A) interest rates rise, which in turn, discourage investment.
B) interest rates fall, which in turn, discourage investment.
C) interest rates rise, which in turn, stimulate investment.
D) interest rates fall, which in turn, stimulate investment.

Correct Answer: