If a bond's price rises because of increased demand, its yield to maturity generally:

If a bond's price rises because of increased demand, its yield to maturity generally:

• A. Rises
• B. Falls
• C. Remains constant
• D. Becomes unpredictable

Answer: (B)

Prices and yields on bonds move in opposite directions. When demand increases, the bond’s market price rises, but the fixed coupon payments and time to maturity stay the same. The yield to maturity is the discount rate that equates those future cash flows to the price you pay, so a higher price means a smaller return relative to cost. Put simply, the higher you pay for the same cash flows, the lower the yield, so yield to maturity falls. For example, a bond with a $1,000 face value and a 5% coupon pays $50 annually; if its price climbs to $1,100, the overall return you’d actually earn by holding to maturity decreases, lowering the YTM.

Prices and yields on bonds move in opposite directions. When demand increases, the bond’s market price rises, but the fixed coupon payments and time to maturity stay the same. The yield to maturity is the discount rate that equates those future cash flows to the price you pay, so a higher price means a smaller return relative to cost. Put simply, the higher you pay for the same cash flows, the lower the yield, so yield to maturity falls. For example, a bond with a $1,000 face value and a 5% coupon pays $50 annually; if its price climbs to $1,100, the overall return you’d actually earn by holding to maturity decreases, lowering the YTM.