Question

The following are correct descriptions about general characteristics of Bonds, EXCEPT:

Question 3 options:

	Bonds in general generate a fixed coupon payment every period, until maturity expires.
	A bond that offers a fixed coupon payment in perpetuity is called a console.
	If the market interest rate increases, then the current price for bonds will increase.
	If the current price of a bond increases, its yield to maturity (YTM) will decrease.

Answer 1

All options except 'If the market interest rate increases, then the current price for bonds will increase.' define the general characteristics of a bond.

A bond is an alternative to depositing in banks or other institutions and earn interest rate on the same. As the interest rate on savings (deposits) increases, it becomes attractive for investors (savers) to put their funds in banks (or other financial institutions) rather than buying bonds. Thus, the demand the bonds falls, making its providers to lower the bond price to make it attractive in comparison to banks.

Therefore, there is an inverse relationship between interest rates and bond price. As one increases, the other falls and vice versa.

Correct answer : If the market interest rate increases, then the current price for bonds will increase.