Question
An insurance company invests in a ₹1,000 face value
bond carrying a 7% annual coupon, maturing in 10 years. Market interest rates fall to 5% soon after purchase. The bond is now trading at a premium. What happens if the company sells the bond before maturity in the secondary market?Solution
When interest rates fall, existing bonds with higher coupon rates (here 7%) become more attractive, increasing their market price. Selling at this higher price earns a capital gain.
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