Final answer:
The future value of a fixed investment increases as the interest rate decreases because the present value of future cash flows is higher when discounted at a lower rate. In bond markets, if interest rates drop after a bond is issued, its price goes up because it offers a relatively higher rate.
Step-by-step explanation:
As the interest rate decreases, the future value of a fixed dollar amount invested today will generally increase. This is because a lower interest rate means that future cash flows from the investment are discounted at a lower rate, making their present value higher. In the context of bonds, if the interest rate falls after a bond is issued, the bond's price increases because the bondholder has a locked-in rate that is more attractive than the new, lower rates available. Conversely, if interest rates rise, then the future payments are discounted at a higher rate, and the present value—and hence, the selling price—of the bond will decrease.