An increase in interest rates has a negative effect on bond prices and a positive effect on the reinvestment of coupons.

Question

Quizplus · Accepted Answer

When interest rates increase, the value of existing bonds decreases because investors can earn a higher rate of return on newly issued bonds. However, the reinvestment of coupon payments into higher-yielding securities can have a positive effect on returns in the future.

An Increase in Interest Rates Has a Negative Effect on Bond