Question

Assume market interest rates have risen substantially in the 5 years since an investor purchased Treasury bonds that were offering a 3% return over their 15-year life. If the investor sells now, he or she is likely to realize a total return that is:__________
A. greater than 6%.
B. less than 6%.
C. equal to 2%.
D. equal to 6%.

Answer 1

Answer: B. less than 6%.

Explanation:

Market interest rates have risen since the investor purchased the treasury bonds which means that the treasury bonds will be less sought after now because they offer a lower return than can be found in the market even if risk adjusted.

The investor will therefore only be able to sell it for a lower price which means that they will receive a lower rate for it. As we cannot say for certain what this rate will be, it is best to say that it will be under 6%.