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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 interest rates is correct, other features being equal?

Longer-maturity bonds generally show larger price changes for a given yield change. Prices and yields move inversely, and higher coupons tend to lower, not raise, sensitivity because duration is shorter, so the other statements are incorrect.

  1. AA bond with a longer maturity generally shows a larger price change for a given change in yieldCorrect
  2. BA rise in market yields increases the price of existing bonds
  3. CA bond with a higher coupon is always more sensitive to yield changes than a lower coupon bond of the same maturity
  4. DPrice and yield move in the same direction

Explanation

Bond prices move inversely to yields, so a rise in yields lowers prices. Longer maturity increases interest rate sensitivity. A higher coupon actually tends to reduce sensitivity (lower duration), so that option is wrong.

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