What describes the relationship between fixed-income security prices and interest rates?

The relationship between fixed-income security prices and interest rates is described as inverse. This means that when interest rates rise, the prices of existing fixed-income securities tend to fall, and conversely, when interest rates fall, the prices of these securities tend to rise.

This inverse relationship exists because fixed-income securities, such as bonds, pay a set rate of interest (coupon payments) to investors. If market interest rates increase, new bonds are issued with higher rates, making existing bonds with lower rates less attractive. Consequently, to sell these older bonds, their prices must decrease to yield a competitive return compared to the new higher-yielding bonds.

Understanding this dynamic is crucial for treasury and investment management, as it impacts portfolio valuation and the overall investment strategy. Investors and fund managers must consider interest rate trends when making decisions about buying or selling fixed-income securities in order to optimize returns and manage risk effectively.