A treasurer purchased a bond (yield to maturity 8%, traded at par) with 6 years maturity and 5-year duration. After 1-year, the market interest rate increased to 9%. After 5^th year, he sold the bond at the fair market price and realized that the rate of return is 8% which was the interest rate 5 years ago. What might explain this outcome?

a. With a higher interest rate, coupon reinvestment return and bond sale value remain unaffected.

b. with a higher interest rate, coupon reinvestment return decreases, and bond sale value increases.

c. with a higher interest rate, coupon reinvestment return and bond sale value decline.

d. with a higher interest rate, coupon reinvestment return and bond sale value increase.

e.with a higher interest rate, coupon reinvestment return increases, and bond sale value declines.

Answer rating: 100% (QA)

Option Eewith a higher interest rate coupon reinvestment return i... View the full answer