How can rising interest rates impact bond values?

How can rising interest rates impact bond values?

• A. They make all bonds more valuable
• B. They can cause newer bonds to be more attractive than older bonds
• C. They have no impact on bond values
• D. They decrease the attractiveness of bond funds

Answer: (B)

Rising interest rates generally lead to a situation where newer bonds, issued at higher rates, become more attractive to investors compared to older bonds that carry lower rates of interest. This phenomenon occurs because when interest rates increase, the fixed interest payments of existing bonds become less appealing in comparison to the new bonds that offer higher returns. Consequently, the market value of older bonds tends to decrease as investors seek out the more lucrative offerings. This dynamic illustrates the inverse relationship between bond prices and interest rates: as rates go up, the prices of existing bonds tend to fall. Thus, the correct choice effectively captures the essence of how rising interest rates impact bond values, highlighting the increased attractiveness of newly issued bonds.

Rising interest rates generally lead to a situation where newer bonds, issued at higher rates, become more attractive to investors compared to older bonds that carry lower rates of interest. This phenomenon occurs because when interest rates increase, the fixed interest payments of existing bonds become less appealing in comparison to the new bonds that offer higher returns. Consequently, the market value of older bonds tends to decrease as investors seek out the more lucrative offerings.

This dynamic illustrates the inverse relationship between bond prices and interest rates: as rates go up, the prices of existing bonds tend to fall. Thus, the correct choice effectively captures the essence of how rising interest rates impact bond values, highlighting the increased attractiveness of newly issued bonds.