CFA Level I · CFA Level I Exam · Interest Rate Risk and Return
The relationship between price and yield to maturity for an option-free, fixed-rate bond is best described as:
The price-yield relationship for an option-free bond is convex and inverse. Higher yields discount the fixed cash flows more heavily and lower the price, while the curve bends so that price gains from falling yields exceed price losses from equal rises in yield.
- ALinear and inverse
- BConvex and direct
- CConvex and inverseCorrect
Explanation
When yield rises, the present value of the fixed cash flows falls, so price and yield are inversely related. The relationship is a curve that is convex to the origin, not a straight line. A direct relationship would imply prices rise as yields rise, which is incorrect.
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