Question

Interest rates generally reflect

A. the potential effects of inflation.
B. the level of risk in an investment.
C. the real value of the investment.
D. the amount of money invested.

Answer 1

The right answer is B. All investments are connected with some risks. Actually, you invest your money, you take risks for it, as you can lose it fully or partially, thus, you should be paid for it. Actually, you give the company an opportunity to use your money, make profits... Consequently, it is justified if you are paid for it. A. Is true in some extent, as the risk includes also the inflation. C. Is also true true in some extent, as you provide your money to someone and they get certain profits. Finally, D is completely false, as the interest rate doesn't reflect the amount of money anyway.

Answer 2

Interest rates generally reflect: B. the level of risk in an investment.

As the interest rates rise, the price of a bond will fall because the opportunity cost of holding that bond will decrease.
This happens because most investors tend to attracted to other investment that reflect the higher interest rates.