A month ago, you bought a one-year bond with a value of $100 that pays a fixed interest rate of 5 percent per year. The interest rate of the economy was also 5 percent. Today you read in the newspaper that the interest rate in the economy decreased to 3 percent. You are holding a bond that is:

Question

Quizplus · Accepted Answer

When the interest rate in the economy decreases from the rate at which a bond was issued (from 5% to 3% in this case), the bond becomes more desirable to other investors because it pays a higher interest rate than what is currently available in the market.

A Month Ago, You Bought a One-Year Bond with a Value