When the market interest rates decline after a bond is issued, the:Group of answer choicesmarket value of the bond increases.face value of the bond decreases.market value of the bond decreases.bond price is at a discount.
Question
When the market interest rates decline after a bond is issued, the:Group of answer choicesmarket value of the bond increases.face value of the bond decreases.market value of the bond decreases.bond price is at a discount.
Solution
The market value of the bond increases.
Here's why:
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When a bond is issued, it comes with a fixed interest rate, also known as the coupon rate. This is the rate of interest that the bond issuer promises to pay the bondholder annually.
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After the bond is issued, market interest rates may fluctuate. If market interest rates decline, new bonds being issued will have a lower coupon rate compared to the bond in question.
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This makes the older bond more attractive to investors, as it offers a higher rate of return. As a result, more investors would want to buy this bond.
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The increased demand for the bond drives up its market price. Therefore, when market interest rates decline after a bond is issued, the market value of the bond increases.
Similar Questions
According to the time value of money, an increase in the market interest rate will result in the following for bondsGroup of answer choicesA decrease in the face value of the bondA decrease in the price of the bondAn increase in the price of the bondAn increase in the face value of the bond
If the stated rate of a bond is higher than the market interest rate:Group of answer choicesThe stated rate will increaseThe bond will trade at a discountThe bond will be priced above the face valueThe coupon payment will increase
Which of the following describes what happens when bonds are issued when the market interest rate is less than the stated interest rate?Group of answer choicesThe bonds are issued at less than their face value.The bonds are issued at a premium.The bonds are issued at a premium and the effective interest rate is higher than the stated rate.It raises the effective interest rate above the stated rate of interest.
When Reserve Bank actions cause interest rates on newly issued bonds to decrease from 6% to 5%, the prices of existing bondsGroup of answer choicesdecreaseincrease only if the coupon rate is greater than 6%.increasemay decrease or increasedecrease only if the coupon rate is less than 5%.
A bond will issue at a discount when:Multiple Choicethe market rate of interest is more than the stated rate of interest.the market rate of interest is less than the stated rate of interest.the market rate of interest is equal to the stated rate of interest.
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