Equity & fixed income
⏱ ~3-min readAceMark Guide
What this topic is really about
Bond prices and interest rates share an inverse relationship because when market rates rise, the fixed coupon payments of existing bonds become less attractive, forcing their prices down to align yields with the market. Option A is incorrect because prices would only rise if market interest rates fell instead.
Beta measures systematic risk, which is the sensitivity of an asset's returns relative to the overall market portfolio and cannot be diversified away. It does not measure total risk, which includes both systematic and idiosyncratic risk and is instead measured by standard deviation.
See the mechanism
Bond prices and interest rates share an inverse relationship because when market rates rise, the fixed coupon payments of existing bonds become less attractive, forcing their prices down to align yields with the market. A diagram for this topic isn't available yet — the worked example below walks the same reasoning step by step.
An exam-style question, fully explained
Bond price moves ___ as interest rates rise:
- Identify what the question tests: Bond price moves ___ as interest rates rise:.
- Bond prices and interest rates share an inverse relationship because when market rates rise, the fixed coupon payments of existing bonds become less attractive, forcing their prices down to align yields with the market.
- Option A is incorrect because prices would only rise if market interest rates fell instead.
Traps the examiner sets
- Option A is incorrect because prices would only rise if market interest rates fell instead.
- A callable bond gives the issuer the right, but not the obligation, to repurchase the bond prior to its scheduled maturity, usually at a predetermined call price.
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