Assume Initially That Market Interest Rates Are 7% and the Bondholder

question 230

Multiple Choice

Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a bond with a face value of $1,000. If market interest rates rise to 8%, the bond price:

• A) falls to $875.
• B) falls to $800.
• C) rises to $1,125.
• D) falls to $700.

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Definitions:

One-Year Return

The total percentage gain or loss on an investment over a one-year period, taking into account both price fluctuations and dividends or interest received.

Unsystematic Risk

Exposure to potential loss tied to a certain firm or field, reducible by varying investment portfolios.

Recession

A significant decline in economic activity spread across the economy, lasting more than a few months.

Inflation

The measure of how quickly the general price level of goods and services rises, depleting the ability to purchase.