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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 the relationship between bond prices and market interest rates is correct?

When market yields rise, prices of existing fixed-coupon bonds fall. Their fixed coupons become less attractive compared with new higher-yielding bonds, so the price must drop to offer buyers a competitive yield. This inverse price-yield relationship applies to all fixed-coupon bonds.

  1. AWhen market yields rise, the prices of existing fixed-coupon bonds fallCorrect
  2. BWhen market yields rise, the prices of existing fixed-coupon bonds rise
  3. CBond prices are unaffected by yield changes until maturity
  4. DOnly zero-coupon bonds change in price when yields change

Explanation

Existing fixed-coupon bonds become less attractive when new bonds offer higher yields, so their prices must fall to give buyers the higher yield. This inverse relationship applies to all fixed-coupon bonds, not just zero-coupon ones.

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