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NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Fixed Income Securities (NISM XXI-A)

Which of the following statements about the relationship between bond prices and market interest rates is correct?

When market yields rise, prices of existing fixed-rate bonds fall. Their coupons are fixed, so discounting the cash flows at a higher required yield gives a lower present value. Bond prices and yields move inversely, with longer-maturity bonds reacting more strongly.

  1. AWhen market yields rise, the prices of existing fixed-rate bonds fallCorrect
  2. BWhen market yields rise, the prices of existing fixed-rate bonds rise
  3. CBond prices are unaffected by changes in market yields until maturity
  4. DA rise in yields raises prices only for bonds with long maturity

Explanation

Existing bonds carry fixed coupons, so when new bonds offer higher yields, the present value of the older bond's cash flows falls and so does its price. The relationship is inverse for all fixed-rate bonds, with longer maturities merely being more sensitive.

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