You just bought a $1,000 bond that is scheduled to mature in ten years. If interest rates rise during the next six months, the market value (or price) of your bond will
A) increase.
B) decrease.
C) remain unchanged.
D) increase or decrease, depending on the marginal tax bracket you are in.

Question

Quizplus · Accepted Answer

When interest rates rise, the market value of existing bonds decreases. This is because the bond with the lower interest rate is less valuable than a newly issued bond with a higher interest rate. Therefore, the price of the $1,000 bond is likely to decrease if interest rates rise during the next six months.

You Just Bought a $1,000 Bond That Is Scheduled to Mature