The Bank of Canada recently announced an increase in its target for the overnight rate. A portfolio manager managing a fixed income portfolio for a client with a moderate risk tolerance should anticipate which of the following immediate effects on existing bond prices?

Question: The Bank of Canada recently announced an increase in its target for the overnight rate. A portfolio manager managing a fixed income portfolio for a client with a moderate risk tolerance should anticipate which of the following immediate effects on existing bond prices?

Answer options: ✅ A decrease in bond prices due to higher discount rates.

• An increase in bond prices due to increased demand for fixed income.
• No significant change as bond prices are primarily affected by inflation expectations.
• An increase in bond prices for short-term bonds and a decrease for long-term bonds.

Correct answer: A decrease in bond prices due to higher discount rates.

Explanation: When the Bank of Canada increases the target for the overnight rate, it generally leads to a rise in other interest rates in the economy. Higher interest rates mean that the future cash flows of existing bonds are discounted at a higher rate, consequently reducing their present value and thus their market price.