Final answer:
The interest income of an open-end bond fund whose sales exceed redemptions will likely decrease if general interest rates increase, due to the higher cost of new bonds and the decrease in value of existing bonds, despite the fixed dollar payments.
Step-by-step explanation:
If general interest rates increase, the interest income of an open-end bond fund whose sales exceed redemptions will likely decrease. This is because the value of the existing bonds will drop as they become less attractive compared to new bonds issued at the higher current interest rates. The yield or interest income earned from the existing lower-rate bonds held by the fund does not change, but the fund must invest in new bonds at higher rates. The increased cost of new bonds effectively reduces the overall interest income of the fund.
When market interest rates rise, as stated in the reference material, the present value of future dollar payments from existing bonds is discounted at a higher interest rate, leading to a decrease in their market value. Therefore, a new investor would pay less than the face value for these bonds, reflecting the higher current interest rates. An open-end bond fund with sales exceeding redemptions will be issuing new shares and would need to invest at the new, higher interest rates, thus incurring higher costs and reducing interest income relative to its overall asset size.