CIMA BA1 · Chapter 12 · Question 7 of 9
Which of the following statements about the relationship between interest rates and bond prices is correct?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) When market interest rates rise, the prices of existing fixed-interest bonds fall
Explanation
Existing bonds pay a fixed coupon. If market rates rise, new investors will only buy existing bonds at a lower price so that their yield matches current rates. There is therefore an inverse relationship between interest rates and bond prices.
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