If the market rate of interest is 7%, the price of 6% bonds paying interest semiannually with a face value of $500,000 will be
A) equal to $500,000
B) greater than $500,000
C) less than $500,000
D) greater than or less than $500,000, depending on the maturity date of the bonds

Question

Quizplus · Accepted Answer

The price of a bond is inversely related to the market interest rate. As the market rate is higher than the coupon rate of the bond (6%), the bond will trade at a discount. The lower price will compensate investors for the lower interest rate. Therefore, the price of the bond will be less than $500,000.

If the Market Rate of Interest Is 7%, the Price