A client holds a $1,000 bond paying a 5% annual coupon. If market interest rates rise to 7%, what happens to the bond's market price?

A client holds a $1,000 bond paying a 5%

Multiple choice — select the best answer

AThe price rises above $1,000 because the coupon is now more attractive
BThe price remains at $1,000 because the coupon payment is fixed
CThe price falls below $1,000 because investors demand a higher yield than the coupon offers
DThe price rises above $1,000 because rising rates signal a strong economy

✓ Correct answer: C. The price falls below $1,000 because investors demand a higher yield than the coupon offers Bond prices and interest rates move inversely; when market rates exceed a bond's coupon rate, the bond must trade at a discount so that its total return equals the prevailing market yield.

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Topic: Uniform Investment Adviser Law

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A client holds a $1,000 bond paying a 5% annual coupon. If market interest rates rise to 7%, what happens to the bond's market price?

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