What does an increase in yield typically indicate about a bond's price?

What does an increase in yield typically indicate about a bond's price?

• A. Price has increased
• B. Price has stabilized
• C. Price has decreased
• D. Price remains unchanged

Answer: (C)

An increase in yield typically indicates that a bond's price has decreased. This relationship exists because the yield of a bond is inversely related to its price. When market interest rates rise or when a bond's credit quality is reassessed negatively, the bond's yield will increase to remain attractive to investors. A higher yield means that new buyers require a greater return for the investment, which can only be offered by lowering the price of the bond. Therefore, if the yield goes up, it signifies that the bond's price has gone down, reflecting the market's adjustment to maintain the bond's competitiveness in the context of available alternative investments.

An increase in yield typically indicates that a bond's price has decreased. This relationship exists because the yield of a bond is inversely related to its price. When market interest rates rise or when a bond's credit quality is reassessed negatively, the bond's yield will increase to remain attractive to investors. A higher yield means that new buyers require a greater return for the investment, which can only be offered by lowering the price of the bond. Therefore, if the yield goes up, it signifies that the bond's price has gone down, reflecting the market's adjustment to maintain the bond's competitiveness in the context of available alternative investments.