You hold a long-term bond yielding ten percent. If interest rates fall shortly before you sell the bond, you will sell at a higher price than if interest rates had been constant.

Question

Quizplus · Accepted Answer

When interest rates fall, the value of existing bonds with higher yields (like your ten percent bond) increases in the market. This is because investors are willing to pay a higher price for these bonds to lock in the higher yield before it becomes unavailable due to falling interest rates. Therefore, if you sell your bond when interest rates have fallen, you will sell at a higher price than if rates had been constant.

You Hold a Long-Term Bond Yielding Ten Percent