Q. With reference to Bonds and Bond Yields, consider the following statements;
1.The movements of bond yields and bond prices are opposite to each other.
2.The rise in bond yields will result in the outflow of funds from equities.
3.The net asset values of debt funds will increase whenever bond yields increase.
Which of the statements given above is/are correct?
Answer: A
Notes:
Statement 1 is correct: Bond Yields are the returns on bonds. The movements of bond yields and prices are opposite to each other. When bond prices rise, yields fall and vice-versa.
Statement 2 is correct: Rising bond yields are generally not good news for equity investors as they raise the cost of funds for companies and start hurting their earnings. It thus leads to an outflow of funds from equities towards a less risky debt instrument.
Statement 3 is incorrect: When bond yields rise and bond prices fall, net asset values of debt funds which hold a sizable chunk of government securities in their portfolios, will also decline.
