Ajax Corp issued 25 year bonds in 2002 with a coupon rate of 6% and a face value of $1,000.The bonds sold for face value when issued.Since 2002,interest rates have increased,so the going rate on similar bonds is now 9%.Which of the following statements is most accurate?

Question

Quizplus · Accepted Answer

Option A is correct because the investor who purchased the bond in 2002 and plans to keep the bond until it matures will earn a fixed coupon rate of 6%, regardless of the current market interest rates. The coupon rate remains fixed over the life of the bond.

Option B is incorrect because bondholders receive interest payments based on the coupon rate and face value of the bond, not the current market interest rates. The interest payment would remain at $60 per year, which is 6% of the face value of $1,000.

Option C is incorrect because the investor who purchased the bond in 2002 expects to earn 6% per year over the life of the bond, not a 9% return.

Option D is incorrect because as interest rates increase, the price of existing bonds generally decreases. So, the price of an Ajax Corp bond should be lower than $1,000 due to the increase in rates.

Ajax Corp Issued 25 Year Bonds in 2002 with a Coupon