CFA Practice Question

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CFA Practice Question

Market price risk affects the yield to maturity earned by a bond investor when ______
A. the bond is sold before maturity and interest rates rise.
B. the bond is sold before maturity and the interest rate is equal to the yield to maturity.
C. the bond is held to maturity and interest rates fall.
Explanation: If the bond has to be sold prior to maturity, its sale price will be lower if rates are higher.

User Contributed Comments 6

User Comment
jasminameron Can anyone explain why?Actually, if the interest rates rise, the income from the sale of the bond could earn a higher interest rate
rainbowsoda investor is bond holder,higher yield means lower price
Tomas Rainbowsda: You are right regarding the inverse relationship. However, I don´t understand why the bond is being sold before maturity. On the contrary if I sell it before mat. i can invest the proceeds at prevailing market rates. I would expect the question to be - bond held to maturity and interest rates increase.
chamad How can it be correct? if the bond is sold before maturity, the investor will have the opportunity to reinvest at higher yield. So how does this affect the yield to maturity. Where is the interest rate risk in the correct answer?
Xocrevilo Question assumes that the impact of interest rate risk can be both positive and negative. The correct answer is the only one where a change in interest rates impacts the investor (i.e. via a higher return on reinvestment income than would have been earned on the same amount if the bond had still been held).
prajacti it is true that if bond is sold before maturity, investor will have opportunity to invest at higher yield, but the proceeds from sale will be less than what he paid for the bond in the first place and also below par.
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