Suppose that one year ago you purchased a $1,000 bond with an interest payment of $40 per year and,at the time,the interest rate was 4 percent.One year later the interest rate on bonds has increased to 5 percent,and you still hold the bond you purchased a year ago.If you were to sell your bond now,the price that you could sell it for would be

Question

Quizplus · Accepted Answer

When interest rates increase, the value of previously issued bonds decreases because new bonds being issued have higher interest rates. This means that investors can earn higher returns on newly issued bonds and they are willing to pay less for existing bonds with lower interest rates. As a result, the price of the bond would be lower than what you paid for it because the interest rate has increased.

Suppose That One Year Ago You Purchased a $1,000 Bond