As interest rates rise, the market price of your bond is also likely to rise.

Question

BlackTom AI · Accepted Answer

The statement to evaluate is: 'As interest rates rise, the market price of your bond is also likely to rise.'
Option 1: True. This is not consistent with how bond prices typically behave in relation to interest rates. When market interest rates go up, newly issued bonds offer higher yields, making existing bonds with lower coupons less attractive, which generally causes their market prices to fall to align with current rates. The inverse relationship between interest rates and bond prices is a fundamental concept in fixed-income investing, so describing prices as rising in a rate-up environment would be incorrect in standard scenarios.
Option 2: False. This option correctly reflects the common financial principle that bond prices move inversely to interest rates. If rates rise, the price of a previously issued bond tends to decrease because its fixed coupon payments are less competitive relative to new bonds issued at the higher prevailing rates. Conversely, when rates fall, existing bonds with higher coupons become more valuable, pushing their prices upward. The key idea is discounting future cash flows at the going market rate; a higher discount rate lowers the present value of those cash flows, reducing the bond’s price.
In sum, option 1 asserts a relationship that contradicts the typical inverse price–rate dynamic for bonds, whereas option 2 states the inverse relationship correctly. The misconception in the first choice often stems from conflating bond yields with prices or not recognizing how present value changes with the discount rate.

BUSFIN 1200 AU2025 (2014) Final Exam- Requires Respondus LockDown Browser

As interest rates rise, the market price of your bond is also likely to rise.

View Explanation

Log in for full answers

Similar Questions

A bond will sell at a discount (below par value) if

You have purchased a bond with a 7% annual coupon rate for $1,060. What will happen to the bond's price if market interest rates rise?

On January 1st, 2005, Borrower Limited sold a 10%, five-year, $100 million bond when bonds of equivalent risk and maturity were yielding 5% annually. Interest payments are made on January 1st next year. What is the Price of the Bond?

All bonds considered below have a face value of $1000. The two-year zero-coupon bond is trading at $906.86 while the two-year bond with annual coupon rate 3% is trading at $962.96. In the absence of arbitrage, what is the fair price of the one-year zero-coupon bond?

A company releases a five-year bond with a face value of $1000 and coupons paid semi-annually. If market interest rates imply a YTM of 6% p.a., which of the following annual coupon rates will cause the bond to be issued at a premium?

A 7-year, 5% coupon bond (payable semi-annually) that was issued 4 years ago is presently trading at a YTM of 9%. Bond has a face value of $1000. Compute the bond's price.

More Practical Tools for Students Powered by AI Study Helper

Homework AI Solver

Stylized AI Paper Writer

Plagiarism Checker Assistant

Citation AI Academic Writing Tool

In-Class Translation Assistant

AI Note Generator

AI Quiz Answers

Past Exam Questions from University Test Bank

Smart Practice Assistant

Adaptive Practice

Making Your Study Simpler

BUSFIN 1200 AU2025 (2014) Final Exam- Requires Respondus LockDown Browser

As interest rates rise, the market price of your bond is also likely to rise.

View Explanation

Log in for full answers

Similar Questions

A bond will sell at a discount​ (below par​ value) if

You have purchased a bond with a ​7% annual coupon rate for ​$1,060. What will happen to the​ bond's price if market interest rates​ rise?

On January 1st, 2005, Borrower Limited sold a 10%, five-year, $100 million bond when bonds of equivalent risk and maturity were yielding 5% annually. Interest payments are made on January 1st next year. What is the Price of the Bond?

All bonds considered below have a face value of $1000. The two-year zero-coupon bond is trading at $906.86 while the two-year bond with annual coupon rate 3% is trading at $962.96. In the absence of arbitrage, what is the fair price of the one-year zero-coupon bond?

A company releases a five-year bond with a face value of​ $1000 and coupons paid semi-annually. If market interest rates imply a YTM of​ 6% p.a., which of the following annual coupon rates will cause the bond to be issued at a​ premium?

A 7-year, 5% coupon bond (payable semi-annually) that was issued 4 years ago is presently trading at a YTM of 9%. Bond has a face value of $1000. Compute the bond's price.

More Practical Tools for Students Powered by AI Study Helper

Making Your Study Simpler

A bond will sell at a discount (below par value) if

You have purchased a bond with a 7% annual coupon rate for $1,060. What will happen to the bond's price if market interest rates rise?

A company releases a five-year bond with a face value of $1000 and coupons paid semi-annually. If market interest rates imply a YTM of 6% p.a., which of the following annual coupon rates will cause the bond to be issued at a premium?