If interest rates in the overall economy decrease to 4 percent,which one of the following is most likely to be the approximate market value of a $1,000 corporate bond with a fixed interest rate of 6 percent?
A)$1,000
B)$1,500
C)$2,000
D)$4,000
E)$6,000

Question

Quizplus · Accepted Answer

When interest rates in the overall economy decrease, the value of existing bonds with higher interest rates increases. This is because the fixed interest rate of 6% becomes more attractive compared to new bonds that would be issued at the lower 4% rate. The exact market value would depend on various factors including the remaining term of the bond, but it would be higher than its face value of $1,000. Among the given options, $1,500 is a reasonable approximation for the increased value of the bond.

If Interest Rates in the Overall Economy Decrease to 4