It happened eleven times last year: The Federal Reserve reduced short-term interest rates in an effort to stimulate the economy.

It's often thought that there's an immediate connection between short-term interest rate changes and fixed-rate mortgage interest levels. That's not the case, instead fixed-rate interest costs are largely related to long-term investment alternatives.

The short-term Funds Rate and Discount Rate controlled by the Fed are designed, among other things, to stimulate the economy by making it less expensive to borrow money in the short term.

If it costs less to borrow, then it's hoped that companies will use cheap money to expand, produce more, and hire additional workers. As a result, unemployment will fall, people will increase purchases, and investors will buy stock with an expectation of higher values. Of course this is all theory: Whether shares values will rise generally, or whether the value of a particular company will rise or fall in the future, cannot be known in advance.

If investors are moving money into the stock markets, they're probably taking that same money from some other investment. Usually that means from safer fixed instruments such as treasury bills, treasury notes and mortgage backed securities.

When there are fewer fixed-note buyers, sellers have to lower note prices to attract buyers. When note prices fall, interest rates rise.

Alternatively, when lots of people want fixed-rate investments, prices rise -- and interest rates fall.

Let's look at an example:

Suppose a $1,000 note pays 5 percent interest. If investors bid up the price of the note to $1,100, the value has increased but the interest rate remains 5 percent of $1,000 or $50. And $50 per year is equal to an interest rate of 4.545 percent for an investment of $1,100.

Conversely, imagine that the note price falls to $900. There is still a $50 annual interest payment. An investor who acquires this note for $900 will earn 5.556 percent.

When investors switch in large numbers from bonds to stocks, bond values generally fall -- and yields rise. When investors leave the stock market and look for safer investments such as bonds and notes, note prices rise and yields decline.