Question

Juan buys a bond with a fixed coupon rate of 3%. Six months later, similar bonds that are issued have a coupon rate of 4%. Which of the following is TRUE if he chooses to sell the bond before maturity?


Juan compra un bono con un cupón fijo del 3 %. Seis meses después, se emiten bonos similares con un cupón del 4 %. ¿Cuál de las siguientes afirmaciones es VERDADERA si decide vender el bono antes del vencimiento?

A.
The price of Juan’s bond will increase---El precio del bono de Juan aumentará

B.
More investors will be willing to buy Juan’s bond---Más inversores estarán dispuestos a comprar el bono de Juan

C.
The interest rate of Juan’s bond will increase to reflect the current market---La tasa de interés del bono de Juan aumentará para reflejar el mercado actual.

D.
The price of Juan’s bond will decrease---El precio del bono de Juan bajará

Answer 1

When Juan originally bought a bond with a fixed coupon rate of 3%, it was in line with the market at that time. However, six months later, similar bonds are now being issued with a higher coupon rate of 4%. This change creates a discrepancy between the new higher-yielding bonds and Juan's existing bond, which pays only 3%.

As a result:

- The price of Juan's bond is likely to decrease because investors would prefer the new bonds that offer a higher return. Consequently, to sell his bond, Juan would have to lower the price to make it attractive in comparison to the new bonds.

Therefore, the correct answer is:

**D. The price of Juan’s bond will decrease---El precio del bono de Juan bajará.**