When systemic interest rates in the economy experience an upward revision, what is the direct impact on the secondary market prices of existing fixed-rate bonds?

[ A ]Market prices of existing fixed-rate bonds increase proportionally.

[ B ]Market prices remain unaffected because the coupon rate is fixed.

[ C ]Market prices rise immediately to match the higher new issue coupon rates.

[ D ]Market prices of existing fixed-rate bonds decline.[ CORRECT ]

Takeaway

Option D is correct: Market prices of existing fixed-rate bonds decline.

Derivation

There is an inverse relationship between prevailing interest rates and the market prices of existing fixed-rate bonds. When market interest rates rise, newly issued bonds offer higher coupons, making older bonds with lower coupon rates less attractive, thereby forcing their secondary market price to drop to adjust yields upward. This question tests the foundational mechanics of interest rate risk. Candidates frequently confuse fixed coupon payments with fixed market capital values.

Why the others fail

A — Market prices of existing fixed-rate bonds increase proportionally.

Bond prices move inversely to interest rate changes; an interest rate hike depresses existing bond valuations.

B — Market prices remain unaffected because the coupon rate is fixed.

While coupon cash flows remain constant, the secondary market valuation fluctuates continuously with interest rates.

C — Market prices rise immediately to match the higher new issue coupon rates.

Existing bond prices drop (sell at a discount) to equalize their yield to maturity with newly issued higher-yielding bonds.