An increase in the market rate of interest can cause a bondholder to realize a capital loss on the sale of their bonds.

Question

Quizplus · Accepted Answer

When the market rate of interest increases, the prices of existing bonds fall because new bonds are issued at the higher rate, making the older, lower-yielding bonds less attractive. If a bondholder sells their bond in this scenario, they may have to do so at a price lower than what they paid, realizing a capital loss.

An Increase in the Market Rate of Interest Can Cause