Question

Which of the following will happen when the yield on a bond goes up, assuming nothing else changes?

a. The coupon payments will increase

b. The coupon payments will decrease

c. The face value of the bond will increase

d. The bond price will decrease

Answer 1

The right option is :-

(d) the bond price will decrese

Explanation :-

There is an inverse relationship between bond yield and its price. So, if bond yield goes up then the bond price will decrease.

For example :- A company issues $1000 bond has yield of 5% so, annual coupon would be $50. Now suppose , yield on similar bonds in market increase to 7% then it means similar bonds are paying $70 as annual coupon in the market. So, in response to increase in bond yield on similar bond , the price of bond issued by company must decrease.

Rejection of other points :-

The coupon payments will neither increase nor decrease in response to increase in yield and face value also does not increase.