If the current market rate for this type and quality of bond is 7.5 percent, then Rosina should expect:

Question

Rosina purchased a 15-year bond at par value when it was initially issued. The bond has a coupon rate of 7 percent and matures 13 years from now. If the current market rate for this type and quality of bond is 7.5 percent, then Rosina should expect:

	A.	the current yield today to be less than 7 percent.
	B.	the bond issuer to increase the amount of all future interest payments.
	C.	today's market price to exceed the face value of the bond.
	D.	to realize a capital loss if she sold the bond at today's market price.
	E.	the yield to maturity to remain constant due to the fixed coupon rate.

Answer 1

The answer is A. Yield and price have an inverse relationship. When the market interest rate goes up, the yield of bonds goes down.