If the market rate of interest is 8%, the price of 6% bonds paying interest semiannually with a face value of $250,000 will be
A) Equal to $250,000
B) Greater than $250,000
C) Less than $250,000
D) Greater than or less than $250,000, depending on the maturity date of the bonds

Question

Quizplus · Accepted Answer

The market rate of interest is 8%, which is higher than the coupon rate of 6% of the bonds. This means that the bonds are less attractive to investors than newly issued bonds with an 8% coupon rate. To compensate for this, the price of the bonds will need to decrease so that the effective yield to the investor is 8%. Therefore, the price of the bonds will be less than the face value of $250,000.

If the Market Rate of Interest Is 8%, the Price