Products & RisksQuestion 7 of 125
Which statement about the relationship between bond prices and interest rates is correct?
a.Bond prices and interest rates move in the same direction
b.Bond prices are unaffected by changes in interest rates
c.When market interest rates rise, existing bond prices fall
d.Only long-term bonds are affected by rate changes; short-term bonds are not
Explanation
Bond prices and market interest rates move inversely. When prevailing rates rise, the fixed coupons of existing bonds become less attractive, so their prices fall; when rates fall, existing bond prices rise. Longer maturities are more sensitive, but all fixed-rate bonds are affected.
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