The Corner Grocer has a 7-year, 6.5 percent semiannual coupon bond outstanding with a $1,000 par value. The bond has a yield to maturity of 5.5 percent. Which one of the following statements is correct if the market yield suddenly increases to 7.25 percent?

Question

Quizplus · Accepted Answer

When the market yield increases, the price of existing bonds falls because new bonds are issued at the higher current interest rate, making the lower-yielding existing bonds less attractive. Therefore, the bond price will decrease, not increase.

The Corner Grocer Has a 7-Year, 6