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Value of a Bond Based on Interest Rates

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Suppose you buy an 8% coupon, 20 year bond today when it is first issued. If interest rates suddenly rise to 12%, what happens to the value of your bond? (coupon payments are semi-annually).

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Solution Summary

This solution explains what would happen to the value of a bond when interest rates suddenly rise. Includes 2 references.

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Interest rates have an inverse relationship with the value of the bond. If interest rates suddenly rise, it is going to decrease the value of the bond. The 8%, 20 year bond will be worth less than when we purchased it as an 8% 20 year bond. As the market interest rates increase, it ...

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