NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Fixed Income Securities (NISM XXI-A)
Which of the following best describes the effect on a bond's price when market interest rates rise, other features unchanged?
The bond's price falls. Price equals the present value of future coupons and principal, so a higher market interest rate means a higher discount rate and a lower present value, giving the inverse relationship between bond prices and yields.
- APrice rises because coupon becomes more attractive
- BPrice falls because future cash flows are discounted at a higher rateCorrect
- CPrice is unchanged as coupon is fixed
- DPrice rises only if the bond is a zero-coupon bond
Explanation
Bond price is the present value of future cash flows. When market yields rise, the discount rate rises and present value falls. The fixed coupon does not protect the price, so price and yield move inversely.
Did you get it right without looking?
One question tells you little. A timed set on Investing in Fixed Income Securities (NISM XXI-A) shows your real accuracy, how long you take and where you lose marks.
More Investing in Fixed Income Securities (NISM XXI-A) questions
- Which statement about interest rate risk on a fixed-rate bond is correct?
- A zero coupon bond with a face value of Rs 1,000 is bought for Rs 800 and redeemed at maturity. How is it issued or traded relative to its f…
- A 3-year bond of face value ₹100 pays a 9% annual coupon. A portfolio manager buys it at ₹100 and holds it until maturity. If the bond is bo…
- Bond A and Bond B have the same maturity and credit rating. Bond A has a coupon of 6% and Bond B has a coupon of 10%. If market yields rise …
- A credit rating agency downgrades a corporate bond issuer from AA to A. What is the most likely immediate effect on the market price of the …
- Which credit rating category would indicate the lowest credit risk for a corporate debt instrument in India?