The statement that "Bond prices vary inversely with changes in the market interest rate" means that if the
A)market interest rate increases, the coupon interest rate will decrease.
B)coupon interest rate increases, then bond prices will go down.
C)market interest rate decreases, then bond prices will go up.
D)coupon interest rate increases, the market interest rate will decrease.

Question

Quizplus · Accepted Answer

The statement means that when the market interest rate decreases, bond prices will go up because investors are willing to pay more for the same coupon rate. Conversely, when the market interest rate increases, bond prices will go down because investors can get the same coupon rate from other bonds issued at a higher rate. The coupon interest rate is fixed, so it does not directly affect the bond price.

The Statement That "Bond Prices Vary Inversely with Changes in the Market