Which of the following statements is true of bond prices?

Question

BlackTom AI · Accepted Answer

Consider the basic relationship between bond prices and prevailing interest rates. 
Option 1 proposes that a fall in bond prices causes interest rates to fall. While market prices can influence expectations, the standard and direct relationship is that rising rates push prices down, not the other way around; this makes the statement incorrect.
Option 2 claims that a fall in interest rates causes a fall in bond prices. In reality, when rates fall, existing bonds with higher coupons become more valuable, typically causing prices to rise, so this option is false.
Option 3 states that bond prices and interest rates are not connected. In fixed-income markets, bond prices and yields are tightly linked through discounting of future cash flows; saying they are unconnected ignores the fundamental inverse relationship, so this is incorrect.
Option 4 asserts that a rise in interest rates causes bond prices to fall. This aligns with the core principle that when new bonds offer higher yields, existing bonds with lower yields become less attractive, reducing their market price. Therefore, this option is correct.

FINA 370-012U Midterm1

Which of the following statements is true of bond prices?

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FINA 370-012U Midterm1

Which of the following statements is true of bond prices?

View Explanation

Log in for full answers

Similar Questions

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

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

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?

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?