If you own a 7% bond maturing in twenty years, and long term rates rise to 10%, what will happen to your bond?

If you own a 7% bond maturing in twenty years, and long term rates rise to 10%, what will happen to your bond?

• A. Sell at a premium.
• B. Be called.
• C. Experience declining interest payments.
• D. Sell at a discount.

Answer: (D)

When you own a bond with a fixed interest rate of 7% and market interest rates rise to 10%, the value of your bond in the market will typically decrease. This is because new bonds are being issued at the higher interest rate of 10%, making them more attractive to investors compared to your bond which pays 7%. As a result, if you want to sell your bond before it matures, you will likely have to sell it for less than its face value, leading to it being sold at a discount. Investors are not willing to pay full price for your bond when they can purchase new bonds that provide higher interest payments. Therefore, the bond's market price adjusts so it reflects the new interest rate environment, resulting in your bond selling at a discount. Options that suggest selling at a premium, being called, or experiencing declining interest payments do not align with the behavior of bond prices in relation to changing market interest rates. Selling at a premium would imply that demand for the bond remains high despite the higher rates, which is generally not the case in this scenario. Being called pertains to situations where the issuer pays off the bond early, typically when rates fall, and declining interest payments does not accurately reflect how bond values or interest

When you own a bond with a fixed interest rate of 7% and market interest rates rise to 10%, the value of your bond in the market will typically decrease. This is because new bonds are being issued at the higher interest rate of 10%, making them more attractive to investors compared to your bond which pays 7%.

As a result, if you want to sell your bond before it matures, you will likely have to sell it for less than its face value, leading to it being sold at a discount. Investors are not willing to pay full price for your bond when they can purchase new bonds that provide higher interest payments. Therefore, the bond's market price adjusts so it reflects the new interest rate environment, resulting in your bond selling at a discount.

Options that suggest selling at a premium, being called, or experiencing declining interest payments do not align with the behavior of bond prices in relation to changing market interest rates. Selling at a premium would imply that demand for the bond remains high despite the higher rates, which is generally not the case in this scenario. Being called pertains to situations where the issuer pays off the bond early, typically when rates fall, and declining interest payments does not accurately reflect how bond values or interest