You chose A

You have bought a 10-year bond with a 10% yield.  The next day interest rates move to 15%.  You will still receive £10k per year.  But the value of your bond has dropped significantly.

£100k would now buy you £15k per year with £100k payment at the end.

You clearly do not need as much as £100k to generate £10k a year with 15% interest rates.
In fact, to buy this same stream of “£10k per year and £100k at the end” would only cost you £75k.

For the more mathematically minded, you simply calculate the Present Value (PV) of all the cashflows using 15% as the discount rate. (bond maths is really not very hard).

Context – You were holding the funds for your gang as the proceeds for a drug deal being completed later today.  When you turn up with only £75k rather than £100k your associates are going to kill you.  Painfully.

If you had been lucky and rates had fallen to 5% instead, then you would have handed over the £100k and kept a tidy profit of £39k for yourself.  Was it worth the risk?

You really should have managed your risk better.

Would you like to change your vote to answer B?  if so click here.

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