Question

A 15-year bond has an annual coupon rate of 8%. The coupon rate will remain fixed until the bond matures. The bond has a yield to maturity of 6%. Which of the following statements is correct?

Answer 1

When interest rates rise, bonds previously issued at lower interest rates will sell for less than face value, while bonds previously issued at higher interest rates will sell for more than face value when interest rates fall.

Step-by-step explanation:

The correct statement in this situation is that when interest rates rise, bonds previously issued at lower interest rates will sell for less than face value. This is because investors can now get higher interest rates on newly issued bonds, making the older ones less attractive.

Conversely, when interest rates fall, bonds previously issued at higher interest rates will sell for more than face value. This is because investors are willing to pay more for the higher interest payments compared to new bonds with lower interest rates.