Question

Analyse the relationship between bond prices and interest rates during recession.

Answer 1

The bond prices and interest rates use to have inverse relationship or they move in opposite direction. If the interest rate increases, the price of bond will decrease and in the interest rate decrease, the price of bond will increase. During recession; interest rates use to decrease therefore prices of the bond increases. Generally during recession investors shift from risky to safer investments and they invest more into bonds therefore due to increase in demand the price of bond increases and the interest rates decreases.