A bond's price and its yield to maturity are inversely related because
A)discounting future payments at a higher rate reduces the present value of the payments.
B)discounting future payments at a higher rate increases the present value of the payments.
C)an increase in the yield to maturity will lower a bond's coupon rate and hence its price.
D)a fall in a bond's price will lower its par value and hence its yield to maturity.

Question

Quizplus · Accepted Answer

Bond prices are determined by discounting future cash flows (i.e. coupon payments and face value) at the prevailing market interest rate. As the yield to maturity increases, the discount rate also increases, causing the present value of the future cash flows to decrease. This leads to a decrease in the bond's price. Therefore, bond prices and yields to maturity have an inverse relationship.

A Bond's Price and Its Yield to Maturity Are Inversely