A customer bought an 8% debenture at a 7.20 basis. If the bonds are currently trading 15 basis points higher, what happens to the bond's market price?

When a bond is trading on the basis, the yield and price are inversely related. In this scenario, the customer initially purchased an 8% debenture at a yield of 7.20%. When bond yields increase, which is indicated by the trading of the bonds 15 basis points higher, the market price of the bond falls.

If the current yield rises to 7.35% (which is 15 basis points higher than 7.20%), this increase in yield means that new bonds are being issued at this higher rate. Consequently, existing bonds that pay a lower coupon rate become less attractive. Therefore, investors will only be willing to buy the existing 8% debenture at a lower price.

Hence, the bond's market price has decreased to reflect the higher yields available in the market. This relationship between bond prices and yields is fundamental in the bond market, captured by the principle that as interest rates rise, existing bond prices fall, and vice versa. This understanding is crucial for evaluating bond investments and their expected returns based on market movements.