CS Executive · Corporate Accounting and Financial Management · Security Analysis
Which statement about the relationship between market interest rates and the price of an existing fixed-coupon bond is correct?
When market interest rates rise, the price of an existing fixed-coupon bond falls. The bond's coupons and principal are fixed, so discounting them at a higher required return reduces their present value, producing an inverse relationship between rates and price.
- AWhen market rates rise, the bond price rises
- BWhen market rates rise, the bond price fallsCorrect
- CBond price is unaffected by market rates until maturity
- DBond price changes only when the coupon rate is revised
Explanation
Bond price is the present value of fixed cash flows. A higher discount rate lowers that present value, so price falls as market rates rise. The coupon on an existing bond is fixed, so price must adjust instead.
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