If market interest rates rise significantly, what will normally happen to the market price of an existing fixed-rate bond?
Correct answer: B. It will generally fall
- A. It will rise proportionately
- B. It will generally fall
- C. It will remain unchanged
- D. It will become equal to face value
Explanation
Existing fixed-rate bonds become less attractive when new bonds offer higher interest rates. Their market prices therefore generally fall so that their effective return becomes competitive.
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