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 8% annual coupon. Its current market price is Rs 1,000. If market yields rise sharply, what is the most likely effect on the bond's price?
The bond price will fall below Rs 1,000. Bond prices move inversely to market yields, and since the coupon is fixed at 8%, a higher market yield makes the existing coupons less attractive, so investors pay less for the bond.
- APrice falls below Rs 1,000Correct
- BPrice rises above Rs 1,000
- CPrice stays exactly at Rs 1,000
- DCoupon rate rises to match the market yield
Explanation
Bond prices and yields move inversely. When market yields rise above the 8% coupon, the fixed coupon becomes less attractive, so the price falls below par. The coupon on a fixed-rate bond does not change.
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