Question

When bond prices go up, interest rates go _______.

a. up

b. down

c. nowhere

Short answer

The correct option, in this case, will be ‘b).down’.

Step-by-step solution

Step 1. Explanation for the correct option

The bond prices and the interest rates are known to have an inverse relationship with each other. The reason for it is that if it becomes easy for people to borrow, it reduces the cost of borrowing or interest rates. They demand more money to make sure that the economy does not go into a liquidity trap and the bond prices rise.

Step 2. Explanation for the incorrect options

Interest rates and bond prices have an inverse relationship. The interest rates go up only when the price of bonds decreases. So, option a is incorrect.

This is incorrect because the interest rates and bond prices influence one another. So, when the interest rate goes down, the price of the bond increases and vice versa. So, option c is incorrect.