CFA Level I · CFA Level I Exam · Fixed-Income Bond Valuation: Prices and Yields
A bond's price is the present value of its promised cash flows discounted at a single market discount rate. If the market discount rate on an option-free bond rises while all else is unchanged, the bond's price will most likely:
The bond's price will fall. A bond's price is the present value of its fixed coupons and principal, so a higher market discount rate lowers the present value of each cash flow, producing an inverse relationship between yield and price for option-free bonds.
- AfallCorrect
- Bstay the same
- Crise
Explanation
Price equals the present value of coupons and principal. A higher discount rate reduces the present value of every cash flow, so the price falls. The inverse relationship between price and yield holds for option-free bonds.
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