Suppose you buy a 7 percent coupon, 20-year bond today when it’s first issued

Accounting May 18, 2021

Suppose you buy a 7 percent coupon, 20-year bond today when it’s first issued. If interest rates suddenly rise to 15 percent, what happens to the value of your bond?

Expert Solution

Answer:

The price of the bond will fall

Price and Yield move in opposite directions. If interest rates rise, the price of the bond will fall. This is because the fixed coupon payments determined by the fixed coupon rate are not as valuable when interest rates rise – hence, the price of the bond decreases.

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