CSEET · Economic and Business Environment · Indian Financial Markets
When market interest rates in the economy rise, what generally happens to the market price of existing fixed-coupon government bonds?
The price of existing fixed-coupon government bonds generally falls. Bond prices and market interest rates move in opposite directions, because new bonds offer higher returns, so older bonds with lower fixed coupons must trade at lower prices to give a competitive yield.
- AThe price fallsCorrect
- BThe price rises
- CThe price stays equal to face value
- DThe coupon rate automatically rises
Explanation
Existing bonds pay a fixed coupon. When market rates rise, new bonds offer higher returns, so existing bonds become less attractive and their prices fall until their yield matches the market. The coupon of an issued bond does not change.
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