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...