Suppose that one year ago you purchased a $100 bond with an interest payment of $5 per year and,at the time,the interest rate was 5 percent.One year later the interest rate has increased to 6.5 percent,and you still hold the bond.If you were to sell your bond now,the price that you could sell it for would be

Question

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As interest rates have increased, the value of the bond decreases. This is because an investor can now earn a higher return on their money by purchasing a new bond with a higher interest rate, so they would not be willing to pay the same price for your bond with a lower interest rate. Therefore, the price you could sell the bond for would be lower than what you paid for it.

Suppose That One Year Ago You Purchased a $100 Bond