2025 ADFP Practice Test – Comprehensive Exam Prep

The relationship between bond prices and interest rates is characterized by an inverse correlation. When interest rates rise, newly issued bonds tend to offer higher yields to attract investors, making existing bonds with lower yields less attractive. As a result, the prices of existing bonds decrease to align with the higher yields being offered by new bonds. Conversely, when interest rates fall, existing bonds with higher yields become more valuable, leading to an increase in their prices. This dynamic plays a crucial role in how investors assess the attractiveness of bonds relative to other investment options. Understanding this inverse relationship is essential for making informed decisions about bond investments and navigating interest rate fluctuations in the financial markets.