You own a bond that has a 7% coupon and matures in 12 years. You purchased this

Question

You own a bond that has a 7% coupon and matures in 12 years. You purchased this bond at par value when it was originally issued. If the market interest rate increases to 7.5%, and you decide to sell the bonds, then you would expect: Select one: a. there will be no change in price b. the bond price to increase and you will realize a capital loss. c. the bond price to decrease and you will realize a capital loss. d. the bond price to decrease and you will realize a capital gain. e. the bond price to increase and you will realize a capital gain.

Explanation / Answer

SInce the market rate is more than the coupon rate the bond will trade at discount to par value. The bond price will decrease and on selling the bond, the bond holder will incur a capital loss

Correct choice: C

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