The price of a bond with a fixed coupon has a/an _______ relationship with the market interest rates.Group of answer choicesvaryinglinearconstantinverse

1. Break Down the Problem

To determine the relationship between the price of a bond with a fixed coupon and market interest rates, we need to analyze how changes in interest rates affect bond prices.

2. Relevant Concepts

The fundamental concept here is the inverse relationship between bond prices and market interest rates. When market interest rates go up, the existing bonds with fixed coupons become less attractive, leading to a decrease in their prices. Conversely, when market interest rates decrease, the existing bonds become more valuable, leading to an increase in their prices.

3. Analysis and Detail

• When interest rates rise:

  • Investors can get new bonds at higher rates.
  • Existing bonds with lower coupon rates are less desirable.
  • Thus, the price of existing bonds falls to make them competitive.

• When interest rates fall:

  • Existing bonds with fixed coupons are more attractive since they yield higher returns compared to newly issued bonds at lower rates.
  • This leads to an increase in the price of existing bonds.

4. Verify and Summarize

This established relationship has been observed consistently in financial markets. Therefore, the correct answer to the question is that the price of a bond with a fixed coupon has an inverse relationship with market interest rates.

Final Answer

The price of a bond with a fixed coupon has an inverse relationship with market interest rates.