All else equal,the holder of a fairly priced premium bond must expect a capital loss over the holding period.

Question

Quizplus · Accepted Answer

A fairly priced premium bond has a coupon rate higher than the prevailing interest rate in the market, hence it is trading at a price higher than its par value. When interest rates rise, the bond's price will decline to adjust to the new prevailing rate. Therefore, the holder of a premium bond must expect a capital loss over the holding period.

All Else Equal,the Holder of a Fairly Priced Premium Bond