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Zorluk: KolayDebt Securities and Bond Structure

An investor holds a 10-year fixed-rate corporate bond trading in the secondary market. If prevailing market interest rates rise, what will happen to the market price of this existing bond?

  1. The market price of the bond will decrease.Cevap
  2. B
    The market price of the bond will increase.
  3. C
    The market price of the bond will remain completely unchanged because the coupon rate is fixed.
  4. D
    The market price of the bond will invert to match the short-term yield curve.

Cevap

The market price of the bond will decrease.
The correct answer highlights the foundational rule of fixed-income securities: bond prices and market interest rates move inversely. When interest rates rise, newly issued bonds offer higher yield payments. To remain competitive with these new issues, existing fixed-rate bonds trading in the secondary market must fall in price.

Adım Adım Çözüm

1
Identify the core relationship being tested.
The core fundamental concept is the inverse relationship between market interest rates and fixed-income bond prices.
When new bonds are issued at higher prevailing rates, older bonds with lower coupon rates must sell at a discount to offer competitive yields to buyers.
2
Determine the impact of rising interest rates on existing bond values.
The market price of the existing bond decreases.
Rising prevailing rates make existing fixed coupon payments comparatively less attractive, pushing secondary market prices downward.

Anahtar Kavram

Inverse Relationship Between Bond Prices and Interest Rates
Tahmini Süre:45s
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Debt Securities and Bond Structure

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