If interest rates in the overall economy increase to 8 percent, which one of the following is most likely to be the market value of a $1,000 corporate bond with a fixed interest rate of 7 percent?
A) $0
B) $1,100
C) $900
D) $1,000
E) $1,300
Since the market rate is greater than the coupon rate, the market price should be less than $1,000.

Question

Quizplus · Accepted Answer

If the market interest rate increases to 8 percent, the bond with a fixed interest rate of 7 percent will become less attractive to investors, as they can now earn a higher rate of return elsewhere. As a result, the market value of the bond will decrease. Based on the relationship between interest rates and bond prices, we can assume that the market value of the bond will be less than $1,000. The closest option to this is $900, which is Choice C.

If Interest Rates in the Overall Economy Increase to 8