HomeQuestionsEconomicsInterest Rates and Bond Prices
📚 Learning Guide
Interest Rates and Bond Prices
hard

How does an increase in market interest rates affect the price volatility of a bond with a fixed coupon rate?

Master this concept with our detailed explanation and step-by-step learning approach

Learning Path
Learning Path

Question & Answer
1
Understand Question
2
Review Options
3
Learn Explanation
4
Explore Topic

Choose the Best Answer

A

Bond prices increase, leading to lower volatility

B

Bond prices decrease, leading to higher volatility

C

Bond prices remain unchanged, causing no volatility

D

Bond prices increase slightly, with moderate volatility

Understanding the Answer

Let's break down why this is correct

Answer

When market interest rates increase, the price of existing bonds with a fixed coupon rate usually decreases. This happens because new bonds are issued at the higher rates, making the older bonds less attractive to investors. For example, if a bond pays 5% interest but new bonds are available at 6%, people will want the new bonds instead. As a result, the price of the older bond must drop so that its yield matches the new higher rates. This relationship between interest rates and bond prices is important because it shows how changes in the economy can affect investments.

Detailed Explanation

When interest rates go up, new bonds pay more. Other options are incorrect because Some might think that higher rates mean bond prices go up; It's a common mistake to think bond prices stay the same.

Key Concepts

interest rates
coupon rate
price volatility
Topic

Interest Rates and Bond Prices

Difficulty

hard level question

Cognitive Level

understand

Ready to Master More Topics?

Join thousands of students using Seekh's interactive learning platform to excel in their studies with personalized practice and detailed explanations.

Start Learning with SeekhExplore More Interest Rates and Bond Prices Questions