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Zorluk: KolayDebt Securities and Bond Structure

An investor purchases a 10-year corporate bond trading at a discount in the secondary market. If market interest rates subsequently decline, what will happen to the secondary market price of this bond?

  1. The market price of the bond will increase.Cevap
  2. B
    The market price of the bond will decrease.
  3. C
    The market price of the bond will remain completely unaffected because it was bought at a discount.
  4. D
    The market price will drop immediately to zero due to heightened credit risk.

Cevap

The market price of the bond will increase.
Fixed-income securities exhibit an inverse relationship with interest rates. When prevailing interest rates decrease, existing bonds paying higher fixed coupon rates become more valuable in the secondary market, causing their market prices to rise.

Adım Adım Çözüm

1
Identify the core relationship tested
Recognize the fundamental inverse relationship between interest rates and bond prices.
When market interest rates change, existing fixed-rate bonds must adjust in market price to offer yields competitive with newly issued bonds.
2
Evaluate the direction of interest rate movement
Market interest rates decline.
Existing bonds with higher fixed coupon rates become more attractive relative to new issues at lower prevailing rates.
3
Determine the resulting price impact
The price of the existing bond rises in the secondary market.
Increased demand for higher-yielding existing bonds bids up their secondary market price.

Anahtar Kavram

Inverse Relationship Between Bond Prices and Interest Rates
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Konular

Debt Securities and Bond Structure

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