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Zorluk: KolayInterest Rate Dynamics and Yield Curve Analysis

An investor holds a portfolio of existing fixed-income bonds in a brokerage account. If prevailing market interest rates suddenly rise, what will happen to the secondary market prices of these existing bonds?

  1. The market prices of existing bonds will decrease.Cevap
  2. B
    The market prices of existing bonds will increase.
  3. C
    The market prices will remain unchanged because bond valuation is governed by Congressional fiscal policy.
  4. D
    The market prices will rise because higher interest rates indicate an inverted yield curve signaling economic expansion.

Cevap

The market prices of existing bonds will decrease.
Bond prices and market interest rates have an inverse relationship. When prevailing interest rates rise, newly issued bonds pay higher coupon yields. Consequently, existing fixed-rate bonds with lower coupon payments become less attractive to buyers, causing their secondary market prices to decrease.

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1
Identify the relationship between prevailing market interest rates and fixed-income bond prices.
Bond prices and interest rates share an inverse (opposite) relationship.
When market interest rates increase, newly issued bonds offer higher coupon rates, making existing bonds with lower fixed coupon rates less attractive unless their price drops to yield a competitive rate.
2
Determine the impact of rising rates on existing fixed-rate bonds.
The secondary market prices of existing bonds fall below their face value.
Prices adjust downward so that the yield on existing bonds rises to match newly prevailing market rates.

Anahtar Kavram

Inverse Relationship Between Bond Prices and Interest Rates
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Konular

Interest Rate Dynamics and Yield Curve Analysis

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