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NISM Certifications · NISM-Series-X-A: Investment Adviser (Level 1) · Investing in Fixed Income Securities

Which statement about the relationship between bond prices and interest rates is correct, other things being equal?

A lower-coupon, longer-maturity bond is more price-sensitive to yield changes. Both features raise its duration, so its price moves more for a given change in yields. Prices move inversely to yields and the size of change differs between bonds.

  1. AA bond with a lower coupon and longer maturity has higher price sensitivity to yield changes than a higher coupon, shorter maturity bondCorrect
  2. BA bond with a higher coupon and longer maturity has the lowest price sensitivity
  3. CPrice sensitivity is unrelated to maturity
  4. DWhen yields rise, bond prices rise by the same proportion for all bonds

Explanation

Longer maturity and lower coupon both increase duration, so price changes more for a given yield change. Prices fall when yields rise, and the proportion differs across bonds.

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