Q. As the price of a bond goes up, its yield goes:
Answer: A
Notes:
Explanation: About the Yield Curve:
- Bond yield is the return an investor realizes on a bond.
- Price and yield are inversely related: As the price of a bond goes up, its yield goes down.
- The yield curve is the graphical representation of yields from bonds (with an equal credit rating) over different time horizons. Under normal circumstances, the yield curve is upward sloping.
- It means as one buys bonds of longer tenure — one gets higher yields. Moreover, a longer tenure also implies that there is a greater risk of failure.
- Inverted Yield Curve: There are times when the bond yield curve becomes inverted e.g., bonds with a tenure of 2 years end up paying out higher yields (returns/ interest rate) than bonds with a 10-year tenure.
- Such an inversion of the yield curve essentially suggests that investors expect future growth to be weak.
Source: EPIC August 2022