Final answer:
The duration of a bond is inversely related to its interest rate. As interest rates rise, the duration of the bond decreases, making it less attractive to investors.
Step-by-step explanation:
The duration of a bond is inversely related to its interest rate. When interest rates rise, the duration of a bond decreases, and vice versa. This means that as interest rates increase, the value of the bond decreases, making it an unattractive investment.
For example, if a bond with an 8% interest rate has one year left to maturity and interest rates rise to 12%, the bond becomes less attractive to investors. The bond seller may then lower the price of the bond below its face value to entice investors to buy it.
Overall, interest rates play a significant role in determining the value and attractiveness of bonds to investors.