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CSEET · Economic and Business Environment · Indian Financial Markets

When market interest rates in the economy rise, what is the usual effect on the market price of existing fixed-coupon bonds?

Prices of existing fixed-coupon bonds fall when market interest rates rise. New bonds offer higher returns, so older lower-coupon bonds become less attractive and must trade at lower prices until their yield matches the market. Bond prices and yields move in opposite directions.

  1. APrices fall, because new bonds offer higher returns than existing onesCorrect
  2. BPrices rise, because coupon payments become more valuable
  3. CPrices remain unchanged because coupons are fixed
  4. DPrices rise only for government bonds and fall for corporate bonds

Explanation

Bond prices and market yields move inversely. When rates rise, newly issued bonds offer higher coupons, so existing lower-coupon bonds must sell at lower prices to give a competitive yield. The claim that fixed coupons keep prices unchanged ignores this repricing.

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