A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates.If the bond pays a 4% annual coupon,what is the likely impact on the holding period return in an investor decides to sell now?

Question

Quizplus · Accepted Answer

If a bond is purchased at a premium and market interest rates rise, the bond's market value will decline because newer bonds would be available in the market with higher interest rates. As a result, the bond's yield will increase, and the current market price will be below its purchase price, leading to a capital loss if sold early. Thus, if an investor decides to sell now, then the holding period return will decrease.

A Bond Was Purchased at a Premium and Is Now