NISM Certifications · NISM-Series-XXI-A: Portfolio Management Services (PMS) Distributors · Investing in Fixed Income Securities (NISM XXI-A)
Which statement correctly describes the relationship between interest rates and the price of an existing fixed-rate bond?
When market interest rates rise, the price of an existing fixed-rate bond falls. Its coupon is fixed, so new bonds offer better returns, and the old bond's price must decline until its yield matches the prevailing market yield.
- AWhen market interest rates rise, the bond price rises
- BWhen market interest rates rise, the bond price fallsCorrect
- CBond prices are unaffected by market interest rates
- DBond prices change only when the coupon is revised
Explanation
Existing bonds carry a fixed coupon. When market rates rise, new bonds offer higher coupons, so existing bonds become less attractive and their prices fall to raise their yield to the market level.
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