If a bond's yield to maturity falls, its price tends to what?

• A. Decrease.
• B. Increase.
• C. Remain constant.
• D. Vary unpredictably.

Answer: (B)

When the yield to maturity on a bond falls, its price tends to rise. This happens because the price is the present value of all future cash flows (coupon payments and the face value at maturity) discounted at the yield to maturity. A lower discount rate means those future payments are worth more in today’s dollars, so the bond’s price increases. Intuitively, if market rates drop, existing bonds with fixed coupons become more attractive relative to new issues, driving up their price until their yield aligns with the new, lower market rate.