The Price–Yield Relationship
Bond prices and yields move inversely: when market interest rates rise, existing bond prices fall, and when rates fall, prices rise — the single most-tested relationship on the SIE.
The classic item gives you a scenario — “rates rise after a bond is issued” — and asks what happens to that bond’s price, or which of four bonds moves most. The answer always hinges on direction first (rates up = price down), then magnitude: for the same rate change, the bond with the longest maturity and lowest coupon swings hardest, so a long-term zero-coupon bond is the maximum-volatility answer and a short-term high-coupon bond the most stable. Watch for the “tell” that a bond now trades at a discount — that signals market rates have risen above its coupon (and a premium signals rates fell).
The trap is blurring price behavior with yield ordering: don’t confuse this seesaw with the yield-measure ranking (at a discount, YTC > YTM > current yield > nominal). Another miss is conflating price/interest-rate risk with reinvestment risk — the zero has the most price risk but no reinvestment risk on coupons, since it pays none. Memory hook: higher coupons act like a shock absorber, cushioning price swings.
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