Answer to Question #206091 in Macroeconomics for fkd

Question

There is a positive relationship between the price of a financial instrument and its interest rate

Answer 1

Solution:

There is an inverse relationship between the price of a financial instrument and its interest rate, that is they have a negative correlation. That is, when one goes up the other one goes down. When the interest rate rises, the price of a financial instrument will fall. Similarly, if the interest rate falls, the price of a financial instrument will rise.

A financial instrument pays a fixed interest rate that becomes more attractive if the interest rate falls, driving up demand and the price of the financial instrument. Conversely, if interest rates rise, investors will no longer prefer the lower fixed interest paid by a financial instrument, resulting in a decline in its price.