Market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were offering a 7% return.If the investor sells now he or she is likely to receive:
A) greater than a 7% total return.
B) less than a 7% total return.
C) a 7% total rate of return.
D) a 7% nominal return but less than a 7% real return.

Question

Quizplus · Accepted Answer

When market interest rates rise, the value of existing bonds decreases as new bonds are now offering higher returns. This means that if the investor sells the bonds now, they would receive a lower price for them compared to what they paid originally, resulting in a total return that is less than 7%.

Market Interest Rates Have Risen Substantially in the 5 Years