Answer to Question #194858 in Economics for Nonhlanhla

Question

Fact A: when the price of bonds, a certain type of financial instrument, increases, the interest rate on the bond decreases.

Fact B: when the repo rate, an interest rate determined by the South African Reserve Bank, increases, the prime rate on loans charged by banks also increases.

What kind of diagram illustrate the relationship described in Fact A?

Answer 1

Bonds have an inverse relationship to interest rates. When the cost of borrowing money rises, bond prices usually fall, and vice-versa.

It can be shown on the price-interest rate graph.