If market interest rates have increased since a company last borrowed long-term funds,the market value of these long-term funds will likely be:
A) greater than their book value.
B) less than their book value.
C) equal to their book value.
D) unknown without knowing the maturity of the debt.

Question

Quizplus · Accepted Answer

When market interest rates increase, the value of existing long-term debt decreases. This is because the interest rate on the existing debt is lower than the prevailing market rate, making it less attractive to potential investors. As a result, the market value of the long-term funds will likely be less than their book value.

If Market Interest Rates Have Increased Since a Company Last