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

A 10-year government bond with a coupon rate of 7% and face value of Rs 1,000 is trading in the market at Rs 1,000. If market yields for similar bonds rise sharply tomorrow, what is the most likely effect on this bond's price?

The price will fall below Rs 1,000. Bond prices move inversely to market yields. A fixed 7% coupon becomes less attractive when new bonds offer higher yields, so investors pay less for it until its yield matches the market.

  1. AThe price will fall below Rs 1,000Correct
  2. BThe price will rise above Rs 1,000
  3. CThe price will stay at Rs 1,000 because the coupon is fixed
  4. DThe face value will be reduced to match the new yield

Explanation

Bond prices and yields move inversely. When market yields rise above the fixed 7% coupon, buyers demand a lower price so that the bond's yield matches the market, so the price falls below par. The fixed coupon does not protect the market price; it only fixes the cash flows.

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