Question

Which of the following statements regarding bond prices and market interest rates are most likely to be true? Interest rate risk can be described as the changes in market interest rates that will cause fluctuations in a bond’s price. Bond prices and market interest rates are negatively related to each other. Coupon paying bonds will trade at a premium to their face value because of the future cash flows expected by bond investors.

Answer 1

The first two statements are true as the risk of the rate of the interest could measure the total market rate of interest that also decline the bond value

Also, there is an inverse relationship between the price of the bond and the market rate of interest. As if the price of the bond increased the rate of interest decrease and if the price of the bond decreased the rate of interest is increased

The third statement is false as it could be traded both at premium and discount. It is in discount when the rate of interest is higher than the coupon and the premium is when the rate of interest is lesser than the bond

Therefore the first two statements are correct