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

Which statement about interest rate risk on a fixed-rate bond is correct?

When market yields rise, bond prices fall, and longer maturity bonds generally fall by more. Price and yield move inversely, and longer duration makes the price more sensitive to yield changes. A fixed coupon fixes cash flows but not market price.

  1. AWhen market yields rise, bond prices rise, and longer maturity bonds rise more
  2. BWhen market yields fall, bond prices fall, and shorter maturity bonds fall more
  3. CWhen market yields rise, bond prices fall, and longer maturity bonds generally fall moreCorrect
  4. DBond prices are unaffected by yields if the coupon is fixed

Explanation

Bond prices and yields move inversely. For a given yield change, a longer maturity bond (higher duration) shows a larger price change. A fixed coupon does not protect the market price; it only fixes the cash flows.

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