Understanding the Relationship between Interest Rates and Bond Prices

B

The relationship between interest rates and bond prices is complex and dynamic. In general, bond prices and interest rates move in opposite directions. This means that when interest rates rise, bond prices fall, and when interest rates fall, bond prices rise.

This inverse relationship between bond prices and interest rates can be explained by the concept of present value. When interest rates rise, the present value of future cash flows decreases, making existing bonds with lower interest rates less valuable. Conversely, when interest rates fall, the present value of future cash flows increases, making existing bonds with higher interest rates more valuable.

However, there are situations where bond prices and interest rates can move in the same direction. For example, during periods of economic growth and high inflation, interest rates and bond prices may both rise as investors demand higher yields to compensate for the increased risk of inflation.

In summary, the relationship between interest rates and bond prices is generally inverse, but there are circumstances where they may move in the same direction. Therefore, the correct answer to the question is C. Sometimes move in the same direction, sometimes in opposite directions.