NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Fixed Income Securities (NISM XXI-A)
Which statement best describes the relationship between bond prices and market interest rates, all else equal?
Bond prices fall when market interest rates rise. A fixed-coupon bond offers a set income, so when new bonds pay higher rates, investors will pay less for the existing bond, pushing its price down until its yield matches the market.
- ABond prices rise when market interest rates rise
- BBond prices fall when market interest rates riseCorrect
- CBond prices are unaffected by market interest rates for fixed coupon bonds
- DBond prices move in the same direction as yield to maturity
Explanation
A fixed coupon bond becomes less attractive when new bonds offer higher rates, so its price falls to raise its yield to the market level. Price and yield move in opposite directions, which rules out the same-direction option.
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