Suppose you purchase a $1,000 bond that bears an interest rate of 10 percent.What will happen if the interest rate goes to 20 percent?

Question

Quizplus · Accepted Answer

When interest rates rise, the market price of existing bonds falls because new bonds are issued at the higher rate, making the older, lower-yielding bonds less attractive. The bond's fixed interest payments are now less competitive compared to the new rate of 20%, hence its market value decreases.

Suppose You Purchase a $1,000 Bond That Bears an Interest