Series 7 practice questioneasyDebt Securities — Bond Pricing — Relationship
When market interest rates increase, the market price of existing bonds will:
- ADecrease✓ Correct answer
- BIncrease
- CRemain the same
- DBecome unpredictable
Explanation
Why A — Decrease
Bond prices and interest rates have an inverse relationship. When market interest rates rise, newly issued bonds offer higher coupon rates, making existing bonds with lower coupons less attractive. As a result, the market price of existing bonds falls until their yield is competitive with current market rates. This is one of the most fundamental principles of fixed-income investing.
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