The reason bond prices and interest rates are inversely related is because
A) bond prices are fixed for the life of a bond.
B) market interest rates stay the same for the life of a bond.
C) the coupon payment is fixed for the life of a bond.
D) bonds are always perpetuities.

Question

Quizplus · Accepted Answer

The coupon payment of a bond is fixed for its life, meaning if market interest rates rise, the fixed coupon payments become less attractive compared to new bonds issued at the higher rates, causing the price of the existing bond to fall to adjust for the yield difference. Conversely, if market rates fall, the existing bond's fixed coupons become more attractive, driving up the bond's price.

The Reason Bond Prices and Interest Rates Are Inversely Related