BOND PRICE & BOND YIELD

December 2019, Paper-II
Question
When the market rate of interest falls which one of the following will happen?
a) Bond price and bond yield, both will rise
b) Bond price and bond yield, both will fall
c) Bond price will rise and bond yield will fall
d) Bond price will fall and bond yield will rise
Answer C
The interest rate is the return or yield a bond produces. Thus when the interest rate falls, the yield reduces. Bonds have an inverse relationship to interest rates; when interest rates rise, bond prices fall and when the interest rate falls, the bond price will increase.