Investors and corporations are on the opposite sides of the interest rate risk scenario. If interest rates go up to 7%, the bondholder holding a bond with a 6% interest rate knows that he could do better. If he is forced to sell his bond on the secondary market before it matures, he will receive less than the face value.

Question

Quizplus · Accepted Answer

Investors and corporations are on the opposite side of the interest rate risk scenario. If corporations issued a bond carrying an interest rate of 7%, and interest rates go down, they are paying more in interest rates than they would be if they waited for interest rates to drop. Investors are thrilled because they made a good investment. Other investors who invest in a similar investment will make less.

Investors and Corporations Are on the Opposite Sides of the Interest