What typically happens to the price of a bond when interest rates rise?

What typically happens to the price of a bond when interest rates rise?

• A. The price of the bond typically increases
• B. The price of the bond typically decreases
• C. The price of the bond remains unchanged
• D. The price of the bond becomes more volatile

Answer: (B)

When interest rates rise, the price of existing bonds typically decreases. This inverse relationship between bond prices and interest rates is a fundamental principle of bond investing. When new bonds are issued at higher interest rates, existing bonds with lower interest rates become less attractive to investors. As a result, the market value of these existing bonds declines to offer a competitive yield that aligns more closely with the newly issued bonds. This relationship is crucial for understanding bond market dynamics. If investors demand a higher return due to increased interest rates, they will only be willing to purchase existing bonds at lower prices, thereby reducing their market value. Therefore, the correct answer reflects this essential concept in fixed-income securities.

When interest rates rise, the price of existing bonds typically decreases. This inverse relationship between bond prices and interest rates is a fundamental principle of bond investing. When new bonds are issued at higher interest rates, existing bonds with lower interest rates become less attractive to investors. As a result, the market value of these existing bonds declines to offer a competitive yield that aligns more closely with the newly issued bonds.

This relationship is crucial for understanding bond market dynamics. If investors demand a higher return due to increased interest rates, they will only be willing to purchase existing bonds at lower prices, thereby reducing their market value. Therefore, the correct answer reflects this essential concept in fixed-income securities.