SIE practice questioneasyInterest Rates and Bond Prices
When interest rates rise, what generally happens to existing bond prices?
- ABond prices fall✓ Correct answer
- BBond prices are unaffected
- CBond prices rise for corporate bonds but fall for government bonds
- DBond prices rise
Explanation
Why A — Bond prices fall
Bond prices and interest rates have an INVERSE relationship. When interest rates rise, existing bonds with lower coupon rates become less attractive compared to newly issued bonds with higher rates, so their prices fall. When interest rates fall, existing bonds with higher coupons become more valuable, and their prices rise. This inverse relationship is one of the most fundamental concepts in fixed income investing and is heavily tested on the SIE exam.
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