If interest rates in the overall economy increase to 8 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 4 percent?
A)$0
B)$400
C)$500
D)$1,000
E)$1,700

Question

Quizplus · Accepted Answer

When interest rates in the overall economy increase, the market value of existing bonds with lower interest rates decreases. A bond with a fixed interest rate of 4 percent becomes less attractive when new bonds are issued at 8 percent, leading to a decrease in its market value. The market value does not drop to zero or as low as $400, and it certainly does not increase; thus, $500 is a reasonable approximation of the decrease in value.

If Interest Rates in the Overall Economy Increase to 8