Canadian Securities Course (CSC) Level 1 Practice Exam 2025 - Free CSC Level 1 Practice Questions and Study Guide

The impact of yield changes on bond prices is primarily influenced by the bond's coupon rate relative to prevailing market interest rates. When market interest rates rise, newly issued bonds typically offer higher yields, making existing bonds with lower yields less attractive. Consequently, the prices of those existing lower-yielding bonds decrease to align their effective yield with the market.

Conversely, bonds with higher yields or higher coupon rates are comparatively less sensitive to yield changes. If market rates increase, the price decline of these higher-yielding bonds is generally less severe because their initial attractiveness remains intact, given that they offer a larger return compared to new issues.

Thus, lower yielding bonds experience a more pronounced impact on price fluctuations as interest rates shift. When interest rates go up, the value of these bonds drops more significantly when compared to higher-yielding counterparts, which have a buffer due to their higher coupon payments. This relationship illustrates the inverse impact of yield changes, where lower-yielding bonds face greater price volatility amid fluctuating rates.