If interest rates in the overall economy decrease to 6 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)$400
B)$1,100
C)$900
D)$1,000
E)$700

Question

Quizplus · Accepted Answer

When interest rates decrease, the market value of existing fixed-rate bonds increases. This is because investors will be willing to pay a higher price for a bond with a higher interest rate than the current interest rate available in the market. Therefore, the market value of a $1,000 corporate bond with a fixed interest rate of 7 percent is most likely to be higher than $1,000 if the current interest rate is 6 percent. Option B, $1,100, is the only option that is higher than $1,000.

If Interest Rates in the Overall Economy Decrease to 6