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Zorluk: KolayGovernment, Municipal, and Corporate Bonds

An investor holds a 10-year U.S. Treasury note paying a fixed 4%4\% annual coupon. If prevailing market interest rates rise to 5%5\%, which of the following best describes the effect on the bond's market price and credit risk?

  1. The market price of the bond will decrease, while its credit risk remains virtually non-existent.Cevap
  2. B
    The market price of the bond will increase to match the higher prevailing market interest rate.
  3. C
    The bond's credit risk will increase, causing its default risk to rise alongside interest rates.
  4. D
    The market price of the bond will remain unchanged because U.S. Treasury debt carries no risk.

Cevap

The market price of the bond will decrease, while its credit risk remains virtually non-existent.
Bond market prices move inversely to prevailing interest rates. When interest rates rise from 4%4\% to 5%5\%, existing fixed 4%4\% coupon bonds sell at a discount (decreasing in price) so their yield becomes competitive with new issues. Additionally, U.S. Treasury debt is backed by the U.S. government, meaning its credit (default) risk remains virtually non-existent.

Adım Adım Çözüm

1
Analyze the relationship between market interest rates and fixed-coupon bond prices.
When market interest rates rise above a bond's fixed coupon rate (5%5\% vs. 4%4\%), existing bonds must trade at a discount to provide competitive yields, causing the bond's market price to drop.
Bond prices and interest rates move in opposite (inverse) directions.
2
Evaluate the credit risk of U.S. Treasury securities.
U.S. Treasury debt is backed by the full faith, credit, and taxing power of the U.S. federal government.
Market rate fluctuations create interest rate risk, not credit or default risk, for Treasury securities.

Anahtar Kavram

Inverse Relationship Between Bond Prices and Interest Rates vs. Credit Risk of U.S. Treasuries
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Konular

Government, Municipal, and Corporate Bonds

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