Suppose that you have a bond that originally cost you to $1,000 to purchase. It pays you $50 in interest each year. That interest payment does not change and the original purchase price will be returned to you far in the distant future. What would happen to the current market price of your bond (yes, there is a market and you can resell the bond to someone else) if interest rates for all similar bonds in the economy rise to 6 percent? A The price of your bond will fall. B The price of your bond will increase. C The price of your bond will remain the same. D There is not enough information to answer this question. Hint Which one you would want to purchase for an investment?
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This means that investors can now earn a higher return by purchasing new bonds with the higher interest rate. As a result, the demand for existing bonds with lower interest rates decreases, causing their prices to fall. In this case, if interest rates for all Show more…
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