Anil buys a bond in the amount of $2,000 with a promised interest rate of 17 percent.If the market interest rate increases to 27 percent,Anil can sell his bond for up to

Question

Quizplus · Accepted Answer

When the market interest rate increases, the price of existing bonds (which have lower interest rates) decreases. The price of Anil's bond can be calculated using the formula for the present value of a bond, which takes into account the promised interest payments and the principal amount at maturity, discounted at the new market interest rate. Given the significant increase in the market interest rate from 17% to 27%, the value of Anil's bond decreases, making option A ($1,259.26) the correct choice as it reflects a decrease in the bond's price in response to the higher market interest rate.

Anil Buys a Bond in the Amount of $2,000 with a Promised