A bond was purchased at a premium and is now selling at a discount because of a change in market interest rates. If the bond pays a 4% annual coupon, what is the likely impact on the holding-period return if an investor decides to sell now?

Question

Quizplus · Accepted Answer

When interest rates rise, bond prices decline, causing the bond to sell at a discount instead of a premium. Selling the bond now would result in a loss, leading to a decreased holding period return.

A Bond Was Purchased at a Premium and Is Now