Assume initially that market interest rates are 7% and the bondholder is receiving a $70 coupon payment per year on a bond with a face value of $1,000. If market interest rates rise to 8%, the bond price:
A) falls to $875.
B) falls to $800.
C) rises to $1,125.
D) falls to $700.

Question

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When market interest rates rise, the price of existing bonds falls. The bond's coupon payment is fixed at $70, but new bonds are offering higher interest rates, making the existing bond less attractive. The bond price falls to $875 to adjust for the new market rate of 8%.

Assume Initially That Market Interest Rates Are 7% and the Bondholder