Assume market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were offering a 6% return over their 15-year life.If the investor sells now,he or she is likely to realize a total return that is:
A) greater than 6%.
B) less than 6%.
C) equal to 2%.
D) equal to 6%.

Question

Quizplus · Accepted Answer

When market interest rates rise, the value of existing bonds with lower interest rates decreases. This is because investors can now buy new bonds with higher interest rates, making the older bonds less attractive. As a result, the investor who purchased the Treasury bonds at 6% return will likely need to sell them at a lower price in order to entice buyers who can now purchase new bonds with higher returns. This means that the total return realized by the investor upon selling the bonds will be less than 6%.

Assume Market Interest Rates Have Risen Substantially in the 5