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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 interest rates and bond prices is correct for a portfolio manager holding fixed income securities?

When market yields rise, the prices of existing fixed-coupon bonds fall. Bond prices and yields are inversely related because new bonds offer higher coupons, making older lower-coupon bonds less attractive, so their market value declines even though their coupons are fixed.

  1. AWhen market yields rise, existing bond prices rise
  2. BWhen market yields fall, existing bond prices fall
  3. CWhen market yields rise, existing fixed-coupon bond prices fallCorrect
  4. DBond prices are unaffected by market yields if the coupon is fixed

Explanation

Bond prices and yields move inversely. A rise in market yields makes existing lower-coupon bonds less attractive, so their prices fall. Fixed coupons do not protect market prices from yield changes.

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