SIE EXAM ASKS ABOUT THE INVERSE RELATIONSHIP BETWEEN BOND PRICES AND BOND INTEREST RATES

Taking the Securities Industry Essentials exam soon? How would you answer the following hypothetical question on inverse relationship between bond dollar price and bond yield?

Harry purchases $100,000 Treasury bills having a maturity of three months and yielding 4.43 percent. Two months later, Harry sells the T bills in the open market when they are yielding 4.02 percent. Harry has realized:

a.    a gain

b.    a loss

c.    neither a gain or a loss

d.    not enough information to answer

The answer is (a). Harry has realized a gain on his T bills. Why a gain? Because Harry purchased these T bills when they were yielding 4.43 percent. Then he sold the T bills when they were yielding 4.02 percent. The yield has decreased from 4.43 to 4.02 percent. Since yield is inversely related to dollar price, that means that Harry's sale dollar price was higher than his purchase dollar price. Harry bought low and then sold high in terms of dollar price. Thus Harry realized a gain.

How do we know that questions on the inverse relationship between yield and price are on the SIE exam? Answer: FINRA's SIE Content Outline says so. In section 2.1.2 of the Content Outline, FINRA lists knowledge of the "relationship between [bond] price and interest rate (i.e., yield)" as required for the test.

Bob Eder's Study for the Securities Industry Essentials Exam contains a discussion of the inverse relationship between bond price and bond yield on page 51 of the text, including several examples.

Here is the link to FINRA's Content Outline for the SIE exam. See the references to the inverse relationship of bond price and bond yield (Required Knowledge) of FINRA's Content Outline, section 2.1.2.

Study for the Securities Industry Essentials (SIE) Exam is available from Amazon in both paperback and Kindle e-book versions. 

See Bob Eder's Author Page on Amazon.com.

For questions about Bob Eder's SIE manual, Study for the Securities Industry Essentials (SIE) Exam, or questions in general about the SIE exam, such as inverse relationship, feel free to email Bob Eder at bobeder@bobeder.net.

Bob Eder received his Juris Doctor (J.D.) degree from the University of Utah, Quinney College of Law in 2001. 

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