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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 the price of a fixed-rate bond is correct?

When market yields rise, the prices of fixed-rate bonds fall. The fixed coupons and principal are discounted at a higher rate, which lowers their present value. This inverse relationship applies to all fixed-rate bonds, and is strongest for longer maturity and lower coupon bonds.

  1. AWhen market yields rise, bond prices rise
  2. BWhen market yields rise, bond prices fallCorrect
  3. CBond prices are unaffected by market yields until maturity
  4. DOnly zero-coupon bond prices respond to yield changes

Explanation

Bond prices and yields move inversely, because future fixed cash flows are discounted at a higher rate when yields rise, lowering present value. All fixed-rate bonds are affected, not only zero-coupon ones, and prices change daily with yields.

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