If overall interest rates in the economy rise, a corporate bond with a fixed interest rate will generally:
A. increase in value.
B. decrease in value.
C. remain unchanged.
D. become worthless.
B?
I chose C.
You are correct, a corporate bond with a fixed interest rate will generally decrease in value if overall interest rates in the economy rise. This is because when interest rates go up, newly issued bonds will offer higher interest rates to attract investors. As a result, existing bonds with lower fixed interest rates become less attractive and their value decreases in order to align with the higher interest rates available in the market. Therefore, the correct answer is B.
B. decrease in value.
When overall interest rates in the economy rise, existing fixed-rate corporate bonds become less attractive compared to newly issued bonds with higher interest rates. As a result, the demand for existing corporate bonds decreases, causing their value to decline. This is because investors can obtain higher yields by investing in new bonds at higher interest rates. Therefore, a corporate bond with a fixed interest rate will generally decrease in value when overall interest rates in the economy rise.