NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities
A 10-year bond with a face value of Rs 1,000 pays a 7% annual coupon and is trading at Rs 1,000. If market yields for similar bonds rise sharply, what will most likely happen to this bond's price?
The bond price will fall below Rs 1,000. Bond prices move inversely to market yields, so when yields on comparable bonds rise above the fixed 7% coupon, buyers pay less for this bond to earn the higher yield. The fixed coupon does not stop price changes.
- AIt will fall below Rs 1,000Correct
- BIt will rise above Rs 1,000
- CIt will stay at Rs 1,000 because the coupon is fixed
- DIt will move to the bond's redemption value immediately
Explanation
Bond prices and yields move inversely. When market yields rise above the fixed 7% coupon, investors demand a lower price so that the bond offers a competitive yield. The fixed coupon does not protect the market price.
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