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Zorluk: KolayDebt Securities and Bond Structure

An investor purchases a fixed-rate corporate bond with a $1,000 par value. If prevailing market interest rates rise shortly after the purchase, what will happen to the market price of the existing bond in the secondary market?

  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 unchanged.
  4. D
    The stated coupon rate of the bond will increase to match market rates.

Cevap

The market price of the bond will decrease.
Bond secondary market prices and prevailing interest rates maintain an inverse relationship. When open-market interest rates rise, newly issued bonds offer higher yield rates. Consequently, existing fixed-rate bonds offering lower coupon payments become less desirable to investors, driving their market prices down until their yield becomes competitive with current market rates.

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1
Identify the core relationship between market interest rates and existing bond prices.
Bond prices and market interest rates share an inverse (opposite) relationship.
When market interest rates rise, newly issued bonds offer higher coupon payments, making existing lower-yielding bonds less attractive unless their price falls.
2
Apply the directional change to determine the price movement.
Since interest rates increased, the secondary market price of the existing bond must fall.
Lowering the bond's price raises its effective yield to compete with newly issued bonds in the market.

Anahtar Kavram

Inverse Relationship Between Bond Prices and Interest Rates
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Konular

Debt Securities and Bond Structure

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