medium · Principles of Finance valuation

If the market yield to maturity (YTM) suddenly increases to 5.5%, what will happen to the bond's price?

1. The price will decrease by exactly 0.5%, a direct one-to-one match to the yield.
2. The price will decrease, and the magnitude of the fall is determined by the bond's duration.
3. The price will increase, because investors now demand higher returns for taking on more risk.
4. The price will remain fixed at par value, since the bond's stated coupon rate of 5.0% never changes.

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