Market interest rates have risen substantially in the five years since an investor purchased Treasury bonds that were offering a 7 percent return.If the investor sells now she is likely to receive:
A)greater than a 7 percent total return.
B)less than a 7 percent total return.
C)a 7 percent total rate of return.
D)a 7 percent nominal return but less than a 7 percent real return.

Question

Quizplus · Accepted Answer

When interest rates rise, the value of existing bonds decreases as they are offering a lower return compared to newly issued bonds. Therefore, if the investor sells now, she is likely to receive a price lower than the face value of the bond and hence less than a 7 percent total return.

Market Interest Rates Have Risen Substantially in the Five Years