Final answer:
When interest rates rise, the price of a bond will decrease because with the increase in the interest rates, newly issued bonds with higher coupons are more preferred by the investors, which means that the price of the existing bonds with lower coupon will be decreased.
Step-by-step explanation:
When interest rates rise, the price of a bond will decrease. This is because as interest rates increase, newly issued bonds with higher coupon rates become more attractive to investors. Therefore, existing bonds with lower coupon rates will need to lower their price in order to compete in the market. In this case, when the yield to maturity increases to 8.5%, the price of the bond will decrease.
When interest rates rise, the price of existing bonds tends to fall. This is because the coupon payments on existing bonds are fixed, and if newly issued bonds are offering higher yields, investors are less willing to pay a premium for bonds with lower yields.
In this case, the bond has a coupon rate of 6.2%, but the current yield to maturity is 8.2%. If interest rates rise further to 8.5%, the bond's yield is still lower than the market rate. As a result, the price of the bond is likely to decrease to bring its yield in line with the new, higher market rate.