The effect of a change in the general level of interest rates on the capital values of traded fixed-interest securities is such that:

Question

Quizplus · Accepted Answer

When the general level of interest rates falls, the fixed-interest securities provide higher interest rates compared to the market. This encourages investors to buy the fixed-interest securities, leading to an increase in demand and a rise in the capital values of the securities. Therefore, holders of these securities will enjoy an appreciation in capital values when the general level of interest rates falls. Thus, option B is the correct answer. Option A is incorrect as a fall in the general level of interest rates will normally promote increases in the capital values of traded fixed-interest securities. Option C is also incorrect as there is a negative relationship between the general level of interest rates and the capital values of traded fixed-interest securities. Option D is therefore incorrect.

The Effect of a Change in the General Level of Interest