A month ago, you bought a one-year bond with a value of $100 that pays a fixed interest rate of 5 percent per year. The interest rate of the economy was also 5 percent. Today you read in the newspaper that the interest rate in the economy increased to 6 percent. You are holding a bond that is:

Question

Quizplus · Accepted Answer

When interest rates in the economy increase, the value of existing bonds with lower interest rates (like the 5 percent bond in this case) becomes less attractive compared to new bonds that can be bought with higher interest rates (6 percent in this case). Therefore, the bond you are holding is less desirable to other investors.

A Month Ago, You Bought a One-Year Bond with a Value