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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities

A 10-year government bond is quoted at a yield to maturity that rises sharply after the RBI raises the repo rate. What happens to the price of an existing fixed-coupon bond, all else equal?

The price of an existing fixed-coupon bond falls when market yields rise. Its coupons and principal are fixed, so discounting them at a higher yield gives a lower present value. Price and yield have an inverse relationship.

  1. APrice falls as yields riseCorrect
  2. BPrice rises as yields rise
  3. CPrice stays the same because coupon is fixed
  4. DCoupon payments are reduced automatically

Explanation

Bond prices and yields move inversely. When market yields rise, the present value of the fixed coupons and principal falls, so the price of an existing bond declines. The coupon does not change, so option about unchanged price is wrong.

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