Final answer:
When the price of the 10-year treasury note increases, the yield on the note decreases. This is due to the inverse relationship between bond prices and yields. For a given change in interest rates, if rates fall, investors would pay more for a bond that offers a higher relative yield compared to newly issued bonds.
Step-by-step explanation:
If the price of the 10-year treasury note rises, the note's yield decreases. This is because the yield, or the interest rate, is inversely related to the bond's price. When you pay more for a bond, the fixed interest payments (coupon payments) represent a smaller percentage of your initial investment, which results in a lower yield.
Given a change in interest rates, you would expect to pay more than $10,000 for the bond if the interest rates have fallen, because as rates fall, existing bonds with higher rates become more valuable and thus more expensive. This reflects the inverse relationship between bond prices and yields.
According to Figure 17.5, while corporate bonds typically offer a higher interest rate compared to Treasury bonds due to the higher risk of borrowing firms over the federal government, the yield of both types of bonds tends to move in concert. Therefore, a change that causes treasury note prices to rise would typically also cause a decrease in the treasury note's yield, in line with the movement of corporate bond yields.
In the context of the financial market as a whole, a rise in the supply of funds, for instance due to increased saving, would lead to a decline in interest rates, as more funds are available for borrowing.