During periods of declining interest rates, long-term bonds can provide investors with impressive capital gains. The best example in recent times occurred in the early 1980s. In September 1981 the bond market was pricing long-term bonds to provide a rate of return of over 18.5% compounded semiannually. Suppose you had purchased 10% coupon bonds in September 1981 with 20 years remaining until maturity. Four and one-half years later (in March 1986) the bonds could have been sold at a prevailing market rate of 9.7% compounded semiannually. What would have been your semiannually compounded rate of total return on the bonds during the 4½-year period?

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The Answer of During periods of declining interest rates, long-term bonds can provide investors with impressive capital gains. The best example in recent times occurred in the early 1980s. In September 1981 the bond market was pricing long-term bonds to provide a rate of return of over 18.5% compounded semiannually. Suppose you had purchased 10% coupon bonds in September 1981 with 20 years remaining until maturity. Four and one-half years later (in March 1986) the bonds could have been sold at a prevailing market rate of 9.7% compounded semiannually. What would have been your semiannually compounded rate of total return on the bonds during the 4½-year period?

During Periods of Declining Interest Rates, Long-Term Bonds Can Provide