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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?

a. the price of the bond will fall
b. the price of the bond will raise

1 Answer

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Answer: a. the price of the bond will fall.

Step-by-step explanation:

If one buys a 7% coupon, 20-year bond today when it’s first issued and the interest rates suddenly rise to 15%, the value of the bond will decrease.

This is because there's an inverse relationship between price and interest rates, that is, the increase in one variable will lead to the decrease in the other variable. When there is a rise in the inters rate, it should be noted that the payments on fixed coupon are worth less.

Therefore, the price of the bond will fall.

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