A bond is issued at a face value of Rs. 100 with a 9% annual coupon. If market interest rates rise, at what price is the bond likely to trade?

Practice question from NISM XV Mock Test 5 — bank. The correct answer is highlighted below with a full explanation.

Options

A

At the face value
B

At a price above face value
At a price below face value

Correct answer
D

At a price that reflects its credit risk

Why this is the answer

Bond prices move inversely to interest rates. When market interest rates rise, new bonds offer higher returns, making existing bonds with lower coupons less attractive. As a result, their prices fall below face value.

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NISM XV Mock Test 5