If Interest Rates Consistently Rise Over a Specific Period, the Market

question 32

Multiple Choice

If interest rates consistently rise over a specific period, the market price of a bond you own would likely ____ over this period. (Assume no major change in the bond's credit risk.)

• A)consistently increase
• B)consistently decrease
• C)remain unchanged
• D)change in a direction that cannot be determined with the above information

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Definitions:

Loan Term

The duration of time agreed upon by the lender and borrower for the repayment of a loan.

Discount Rate

The interest rate charged to commercial banks and other depository institutions for loans received from a central bank's discount window; or alternatively, used in discounted cash flow (DCF) analysis to present value future cash flows.

Present Value

The immediate value of a future amount of money or stream of payments, given a set rate of return.

Annuity

An investment vehicle that disburses a fixed series of payments to an individual, typically serving as an income provision for those who have retired.