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 market interest rates rise, bond prices decrease. As a result, the investor who purchased the bond at a 7 percent return will now receive less than that if she sells the bond now. Therefore, the total return will be less than 7 percent.

Market Interest Rates Have Risen Substantially in the Five Years