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SIE practice questioneasyBond Pricing — Interest Rate Relationship

When market interest rates rise, the price of an existing fixed-rate bond will:

  1. AFall✓ Correct answer
  2. BRise
  3. CFluctuate randomly
  4. DStay the same
Explanation

Why A — Fall

Bond prices and interest rates have an inverse relationship. When rates rise, newly issued bonds offer higher yields, making existing bonds with lower coupon rates less attractive. Their prices fall to bring their yield in line with the new market rates. This is a fundamental concept in fixed-income investing.

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