Question 63

Prices decrease when interest rates increase.

Treasury securities have an inverse relationship with interest rates; when interest rates rise, the prices of existing Treasury securities typically fall. This is a fundamental characteristic of fixed-income securities, including Treasury bonds, notes, and bills.

A) Prices decrease when interest rates increase.

This statement is correct as it accurately reflects the relationship between interest rates and the prices of Treasury securities. When interest rates rise, new securities are issued at these higher rates, making existing securities with lower rates less attractive, thus driving their prices down.

B) They are illiquid.

This statement is incorrect. Treasury securities are among the most liquid financial instruments available. They can be easily bought and sold in the secondary market, allowing investors to convert them to cash quickly without significant price concessions.

C) They are not affected by inflation or changes in interest rates.

This statement is incorrect. Treasury securities are indeed affected by changes in interest rates, and while they offer a level of safety, they are not immune to inflation. Inflation can erode the purchasing power of the fixed interest payments they provide.

D) They are only permitted to be purchased by institutional investors.

This statement is also incorrect. Treasury securities can be purchased by both institutional and individual investors. They are widely accessible and are often recommended for a variety of investment strategies, including those of retail investors.

Conclusion

The correct answer, that prices decrease when interest rates increase, is a key concept in understanding the dynamics of Treasury securities. All other options fail to accurately describe the characteristics of these securities, either misrepresenting their liquidity, their relationship to inflation, or their accessibility to investors.