Encana Corp.is planning to issue $1,000 bonds with a stated interest rate of 7% and a maturity date of July 15,2019.Interest rates fall in the economy so that similar financial investments pay 5%.Encana will:
A)not be able to issue the bonds from the market because no one will buy them.
B)receive a higher issue price as buyers compete for the bonds.
C)have to accept a lower issue price to attract buyers.
D)have to reprint the bond certificates to change the stated interest rate to 5%.

Question

Quizplus · Accepted Answer

When interest rates in the economy fall below the bond's stated interest rate, the bond becomes more attractive to investors because it pays a higher return than what is currently available in the market. Therefore, demand for the bond increases, leading to a higher issue price as buyers compete for the higher-yielding investment.