As interest rates, and consequently investors' required rates of return, change over time, the ________ of outstanding bonds will also change.

Question

Quizplus · Accepted Answer

As interest rates change, the price of outstanding bonds will also change. This is because the bond's price is based on the present value of its future cash flows, which include the coupon interest payments and the final principal payment at maturity. When interest rates rise, the required rate of return for investors also rises, making the future cash flows less valuable and causing the bond price to fall. Conversely, when interest rates fall, the bond price rises.

As Interest Rates, and Consequently Investors' Required Rates of Return