Question

Which of the following are generally true of all​ bonds? A. A fall in interest rates results in capital losses for bonds whose terms to maturity are longer than the holding period. B. Prices and returns for shortminusterm bonds are more volatile than those for longer term bonds. C. Even though a bond has a substantial initial interest​ rate, its return can turn out to be negative if interest rates rise. D. The longer a​ bond's maturity, the greater is the rate of return that occurs as a result of the increase in the interest rate.

Answer 1

Answer: Option " C. Even though a bond has a substantial initial interest​ rate, its return can turn out to be negative if interest rates rise. " is generally true of all bonds.

Explanation: The negotiation of bonds in the open market can lead to a negative return on the bonds if the price of the bonds is negotiated with a sufficient premium. Remember that bond prices change inversely with the yield of a bond, the higher the price of a bond, the lower the yield. At some point, the price of a bond may increase enough to imply a negative return for the buyer.